UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K(Mark One)

� ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: October 31, 2004

or

� TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-4423

HEWLETT-PACKARD COMPANY(Exact name of registrant as specified in its charter)

Delaware 94-1081436(State or other jurisdiction of (I.R.S. employerincorporation or organization) identification no.)

3000 Hanover Street, Palo Alto, California 94304(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code: (650) 857-1501

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered

Common stock, par value $0.01 per share New York Stock Exchange, Inc.The Nasdaq Stock Market, Inc.

The Pacific Exchange, Inc.Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes � No �

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. �

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct). Yes � No �

The aggregate market value of the registrant’s common stock held by non-affiliates was $59,850,144,000based on the reported last sale price of common stock on April 30, 2004, which was the last business day ofthe registrant’s most recently completed second fiscal quarter.

The number of shares of HP common stock outstanding as of December 31, 2004 was 2,910,039,823shares.DOCUMENTS INCORPORATED BY REFERENCEDOCUMENT DESCRIPTION 10-K PART

Portions of the Registrant’s notice of annual meeting of shareowners and proxy statement to be filed pursuant to II, ITEM 5Regulation 14A within 120 days after Registrant’s fiscal year end of October 31, 2004 are incorporated by reference IIIinto Part II, Item 5 and Part III of this Report.

Forward-Looking Statements

This Annual Report on Form 10-K, including ‘‘Management’s Discussion and Analysis of FinancialCondition and Results of Operations’’ in Item 7, contains forward-looking statements that involve risks,uncertainties and assumptions. If the risks or uncertainties materialize or the assumptions prove incorrect,the results of Hewlett-Packard Company and its consolidated subsidiaries (‘‘HP’’) may differ materially fromthose expressed or implied by such forward-looking statements and assumptions. All statements other thanstatements of historical fact are statements that could be deemed forward-looking statements, including butnot limited to any projections of earnings, revenue, expenses, cash repatriation, share repurchases or otherfinancial items; any statements of the plans, strategies and objectives of management for future operations,including the execution of restructuring plans and remediation of execution issues; any statementsconcerning developments, performance or market share relating to products or services; any statementsregarding future economic conditions or performance; any statements regarding pending investigations,claims or disputes; any statements of expectation or belief; and any statements of assumptions underlyingany of the foregoing. The risks, uncertainties and assumptions referred to above include macroeconomic andgeopolitical trends and events; the outcome of pending legislation; the execution and performance ofcontracts by suppliers, customers and partners; employee management issues; the challenge of managingasset levels, including inventory; the difficulty of aligning expense levels with revenue changes; assumptionsrelated to pension and other post-retirement costs; and other risks that are described herein, including butnot limited to the items discussed in ‘‘Factors that Could Affect Future Results’’ set forth in ‘‘Management’sDiscussion and Analysis of Financial Condition and Results of Operations’’ in Item 7 of this report, andthat are otherwise described from time to time in HP’s Securities and Exchange Commission reports filedafter this report. HP assumes no obligation and does not intend to update these forward-looking statements.

PART I

ITEM 1. Business.

HP is a leading global provider of products, technologies, solutions and services to individualconsumers and businesses. Our offerings span information technology (‘‘IT’’) infrastructure and storage,personal computing and other access devices, multi-vendor services including maintenance, consultingand integration and outsourcing, and imaging and printing. Our products and services are availableworldwide.

HP was incorporated in 1947 under the laws of the State of California as the successor to apartnership founded in 1939 by William R. Hewlett and David Packard. Effective in May 1998, wechanged our state of incorporation from California to Delaware. In May 2002 we acquired CompaqComputer Corporation (‘‘Compaq’’), which significantly expanded the breadth and depth of ourproduct offerings, increased our overall scale and reach, drove substantial improvements in our coststructure and generally improved our competitive position.

Our business strategy revolves around the following strategic imperatives:

• To provide customers with superior products, services and overall experiences by providing leading-edge technologies that work seamlessly together.

We seek to be a leader in each of the specific product and service categories in which wecompete and to expand actively into new and adjacent markets. At the same time that we focuson individual offerings, we seek to leverage the depth and breadth of our products, services andstrategic partnerships to address new and emerging market demands by seamlessly integratingvarious products and services that offer new customer experiences. We believe that these newexperiences are shaped increasingly by customer demands for products and services that aredigital, mobile, virtual and personal, and we emphasize these as the foundation for our design.

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By leading these trends we seek both to expand our current businesses and to grow into newcategories.

Digital refers to the shift from analog, physical and labor-intensive tasks and processes, tocomputer-based formats. For example, in photography, capturing and developing photostraditionally relied on chemistry, physical transportation and film canisters; the digitalphotography process does not have these requirements and restrictions, which makes it moreflexible, more productive and easier to use. Other processes continue similar shifts, creating newopportunities.

Mobile refers to the fact that, because of the shift to digital technology, information is not tiedto a particular physical location. People are able and expect to access, exchange and respond tocritical information and services anywhere, at any time, using myriad devices such as phones,hand-held computers, notebook computers and even GPS devices in their cars.

Virtual experiences substitute for experiences that require a human being present; they arecarried on by means of computers. More and more processes are becoming virtualized. Forexample, software can run an IT data center in the absence of a human IT manager, and videoconferencing allows people to collaborate with others in a meeting thousands of miles from theiroffice.

Personal preferences, information, style and biases increasingly dictate people’s experience withtechnology. Individuals—whether consumers or business people—are increasingly in control,demanding customized and highly personalized products, services and solutions to suit theirtastes and needs. For example, digital technology allows people to customize their televisionprogramming, music playlists, and even the settings of features in their cars.

• To deliver to business customers the best return on IT investments in the industry

We believe that, in addition to desiring leading technologies, customers also increasingly demandthe most cost-effective solutions for their needs. We seek to address this requirement boththrough our architectures and our sales processes. Our Adaptive Enterprise platform and ourSmart Office initiative demonstrate our approach.

Our Adaptive Enterprise platform, which is the name of our extended business infrastructureoffering, leverages our portfolio to deliver enterprise-wide products and services emphasizingstandardization, virtualization, simplification, modularity and integration. We believe thatdesigning with these principles provides the most cost-effective infrastructures that can flexiblyadapt to changing business dynamics.

Through our Smart Office initiative, HP seeks to optimize the value small and medium business(‘‘SMB’’) customers receive from their technology investments by pairing local and specializedexpertise from HP and its channel partners to help SMB customers plan, purchase andimplement high quality technology solutions from across our businesses more effectively andefficiently.

• To build world class cost structures and processes across our entire portfolio of businesses

We believe that value is increasingly driven through horizontal processes, not vertical processes.Accordingly, we are focused on leveraging our scale to maximize purchasing efficiency andleveraging our global footprint to maximize technical expertise and cost structure improvementsavailable in different regions around the world. We also have created horizontal organizations todrive the technology imperatives mentioned above across our businesses.

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• To focus our innovation and research and development

Our approach to research and development is to make targeted investments in areas where wecan make unique contributions and achieve differentiation while partnering with top providers inother areas to enable us to provide our customers complete IT solutions.

HP Products and Services; Segment Information

During fiscal 2004, our operations were organized into seven business segments: the PersonalSystems Group (‘‘PSG’’), the Imaging and Printing Group (‘‘IPG’’), Enterprise Storage and Servers(‘‘ESS’’), HP Services (‘‘HPS’’), HP Financial Services (‘‘HPFS’’), Software and Corporate Investments.Given the cross-segment linkages in our Adaptive Enterprise offering, and in order to capitalize onup-selling and cross-selling opportunities, ESS, HPS and Software are structured beneath a broaderTechnology Solutions Group (‘‘TSG’’). While TSG is not a business segment, this aggregation providesa supplementary view of our business.

A summary of our net revenue, earnings from operations and assets for our business segments isfound in Note 18 to the Consolidated Financial Statements in Item 8, which is incorporated herein byreference. A discussion of factors potentially affecting our operations is set forth in ‘‘Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Factors That Could AffectFuture Results,’’ in Item 7, which is incorporated herein by reference.

Technology Solutions Group

TSG’s mission is to coordinate HP’s Adaptive Enterprise offering across organizations to createsolutions that allow customers to manage and transform their business and IT environments. TSGallows us to leverage the resources and capabilities of our portfolio by applying key design principlesconsistently across business, application and infrastructure services with a vision of standardization,simplification, modularity and integration. Each of the business segments within TSG is described indetail below.

Enterprise Storage and Servers

The server market continues to shift towards standards-based architectures as proprietary hardwareand operating systems are being replaced by industry-standard server platforms that typically offercompelling price/performance advantages by leveraging standards-based operating systems andmicroprocessor designs. At the same time, critical business functions continue to demand particularscalability and reliability. By providing a broad portfolio of server and storage solutions, ESS aims tooptimize the combined product solutions required by different customers and provide solutions for awide range of operating environments. In 2004, HP continued to ship more servers than any othervendor in the industry. ESS provides storage and server products in a number of categories.

Business Critical Servers. Business critical servers include Reduced Instruction Set Computing(‘‘RISC’’)-based servers running on the HP-UX operating system, Itanium�(1)-based servers running onHP-UX, Windows�(2) and Linux and the HP AlphaServer product line running on both Tru64UNIX�(3) and Open VMS. The various server offerings range from low-end servers to high-endscalable servers, including the Superdome line. Additionally, HP offers its NonStop fault-tolerant serverproducts for business critical solutions.

(1) Itanium� is a registered trademark of Intel Corporation.(2) Windows� is a registered trademark of Microsoft Corporation.(3) UNIX� is a registered trademark of The Open Group.

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Industry Standard Servers. Industry standard servers include primarily entry-level and mid-rangeProLiant servers, which run primarily on the Windows, Linux and Novell operating systems andleverage Intel- and AMD-based processors. The business spans a range of product lines that includepedestal-tower servers, density-optimized servers and blade servers. HP’s industry-standard serverbusiness continues to lead the industry in terms of units shipped and has a strong position in bladeservers, the fastest-growing segment of the market.

Storage. HP’s StorageWorks offerings include entry-level, mid-range and enterprise arrays, storagearea networks, network attached storage, storage management software and virtualization technologies,as well as tape drives, tape libraries and optical archival storage. HP’s storage offerings continue to beheavily weighted toward the tape drive and tape library markets.

HP Services

HPS provides a portfolio of multi-vendor IT services including technology services, consulting andintegration, and managed services. HPS also offers a variety of services tailored to particular industriessuch as manufacturing, network and service providers, financial services and government and educationand services for the rest of the public sector. In collaboration with ESS and Software, HPS teams withsoftware and networking companies and local systems integrators to bring solutions to HP’s customers.Although the largest segment of the overall services market is in outsourcing, HPS is weighted moreheavily towards Technology Services (formerly called Customer Support). However, Managed Servicesbecame a larger portion of HPS revenue as it continued to grow at greater-than-market rates in fiscal2004.

Technology Services. HPS provides a range of technology services from standalone productsupport to high availability services for complex, global, networked, multi-vendor environments. Thisbusiness also manages the delivery of product warranty support through its own service organization, aswell as through authorized resellers.

Consulting and Integration. HPS provides consulting and integration services that help customersmeasure, assess and maintain the link between business and IT; design and integrate the customers’environments into a more adaptive infrastructure; and align, extend and manage applications andbusiness processes. Consulting and integration provides cross-industry solutions in areas such as supplychain, business portals, messaging and security.

Managed Services. Managed services offers IT management services, including comprehensiveoutsourcing, transformational infrastructure services, client computing managed services, managed webservices, application services and business process outsourcing, as well as business continuity andrecovery services.

Software

Software provides management software solutions, including support, that allow enterprisecustomers to manage their infrastructure, operations, applications and business processes under the HPOpenView brand. In addition, Software delivers a suite of comprehensive, carrier-grade platforms fordeveloping and deploying next-generation voice, data and converged services to network and serviceproviders under the HP OpenCall brand.

HP is focused on extending its leadership position in network-management software intoapplication and business process management. As part of this drive, HP has made targeted softwareacquisitions that have integrated technology and functionality enhancements into the HP OpenViewofferings and facilitated this extension. Having substantially integrated this new functionality, Softwareis focused now on driving revenue growth with the enhanced products.

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Personal Systems Group

PSG is one of the leading vendors of personal computers (‘‘PCs’’) in the world based on unitvolume shipped and annual revenue. PSG provides commercial PCs, consumer PCs, workstations,handheld computing devices, digital entertainment systems, calculators and other related accessories,software and services for commercial and consumer markets. Like the broader PC market, the PSGorganization continues to experience a shift toward mobile products such as notebooks. Bothcommercial and consumer PCs are based predominately on the Windows operating system and useIntel and AMD processors.

Commercial PCs. PSG offers a variety of personal computers optimized for commercial uses,including enterprise and SMB customers, and for connectivity and manageability in networkedenvironments. These commercial PCs include the HP business desktops and the HP Compaq businessseries, as well as Evo notebook PCs and Compaq Tablet PCs for mobile professionals.

Consumer PCs. Consumer PCs include the HP Pavilion and Compaq Presario series of multi-media consumer desktop PCs and notebook PCs, as well as HP Media Center PCs, and are targeted atthe home user. In addition to optimizing configurations and value, PSG seeks to differentiate itsproducts with distinguishing features such as the HP Personal Media Drive, a removable hard drivethat can easily plug into an HP Media Center PC or be removed and used as an external hard drivewith any notebook or PC supporting the common USB standard, allowing consumers to take theirdigital media with them.

Workstations. Workstations are individual computing products designed for users demandingenhanced performance, such as computer animation, engineering design and other programs requiringhigh-resolution graphics. HP provides workstations for UNIX, Windows and Linux-based systems.

Handheld Computing. HP provides a series of iPAQ handheld computing devices that run onWindows Mobile software. These products range from entry-level devices primarily used as organizersto advanced handheld computing devices with biometric security, wireless connectivity and even built-inphone and camera capabilities.

Digital Entertainment. PSG’s digital entertainment products are targeted at the intersection of thepersonal computing and consumer electronics markets and span a range of products and productcategories that allow customers to enjoy a broad range of digital entertainment experiences and toenjoy their digital content. PSG’s digital entertainment products include DVD+RW drives; the HPMovie Writer, which converts traditional VCR tapes into DVD’s; the HP Digital Entertainment Center,which allows consumers to access their music, movies, home videos and photos from a single device viaremote control; plasma and LCD flat-panel televisions; and the Apple iPod�(4) from HP.

Imaging and Printing Group

IPG is the leading imaging and printing systems provider in the world for printer hardware,printing supplies and scanning devices, providing solutions across customer segments from individualconsumers to small and medium businesses to large enterprises. IPG’s products can be categorizedgenerally as home and business printing, imaging and publishing devices and systems, digital imagingproducts and printer supplies.

Printing and Imaging Devices and Systems. Home and business printing, imaging and publishingdevices and systems include color and monochrome single-function printers for shared and personaluse, printer- and copier-based multi-function devices, inkjet and laser all-in-one printers, wide- andlarge-format inkjet printers and digital presses. Key initiatives in this area of IPG’s business include

(4) iPod� is a registered trademark of Apple Computer, Inc.

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driving color printing penetration in the office and continuing to expand further into high-end officeimaging systems.

Digital Imaging. An important part of IPG’s strategy is to provide digital imaging solutions thatrival traditional imaging for quality, cost and ease of use so that consumers can manage their digitalimaging at home. Digital imaging products include Photosmart printers, digital photography productsand scanners. HP is focused on driving a user-friendly experience across this range of products byensuring compatibility and common user interfaces, where possible, and creating products thatanticipate and address the way in which consumers seek to use these technologies.

Supplies. Printer supplies include laser and inkjet printer cartridges and other related printingmedia. These supplies include HP-branded Vivera ink and HP Premium and Premium Plus photopapers, which together are designed to work as a system to produce faster prints with improvedresistance to fading, increased print quality and better affordability.

HP Financial Services

HPFS supports and enhances HP’s global product and service solutions, providing a broad rangeof value-added financial life cycle management services. HPFS enables our worldwide customers toacquire complete IT solutions, including hardware, software and services. The group offers leasing,financing, utility programs and asset recovery services, as well as financial asset management servicesfor large global and enterprise customers. HPFS also provides an array of specialized financial servicesto SMB customers and education and government entities. HPFS offers innovative, customized andflexible alternatives to balance unique customer cash flow, technology obsolescence and capacity needs.

Corporate Investments

Corporate Investments is managed by the Office of Strategy and Technology and includes Hewlett-Packard Laboratories, also known as HP Labs, and certain business incubation projects. Revenue inthis segment is attributable to the sale of certain network infrastructure products and, in particular,gigabit ethernet switch products that enhance computing and enterprise solutions as well as thelicensing of specific HP technology to third parties.

Sales, Marketing and Distribution

We continue to manage our business and report our financial results based on the principalbusiness segments described above. However, we organize the marketing and selling of our productsand services separately according to customer and distribution types. Our customers are organized byconsumer and commercial customer groups, and distribution is organized by direct and channel. Withinthe channel, we have various types of partners that we utilize for various customer groups. The partnersinclude the following:

• retailers that sell our products to the public through their own physical or internet stores;

• resellers that sell our products and services, frequently with their own value-added products orservices, to targeted customers groups;

• distribution partners that supply our solutions to smaller resellers with whom we do not havedirect relationships;

• independent distributors that sell our products into geographies or customer segments in whichwe have a lesser presence;

• original-equipment-manufacturers (‘‘OEMs’’) that integrate our products with their ownhardware or software and sell the integrated product;

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• independent software vendors (‘‘ISVs’’) that provide their clients with specialized softwareproducts that frequently drive additional products and services and often assist us in selling ourproducts and services to clients purchasing their products; and

• systems integrators that provide various expertise in designing and implementing custom ITsolutions and often partner with HPS to extend their expertise or influence the sale of ourproducts and services.

The balance of channel types varies by product category. For instance, we sell consumer PCslargely through the retail channel and IPG products are sold largely through consumer and commercialchannels, but customers also can purchase these products directly from HP. High-end commercialsolutions generally are sold directly to customers, though lower-end servers may be sold either throughthe channel or directly. We have distribution programs and incentive offerings for certain of ourchannel partners that include volume-based incentives, product promotions, rebates, price-protectionterms, and rights to return products. Information on how these programs impact our financial reportingcan be found in ‘‘Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Critical Accounting Policies—Revenue Recognition’’ in Item 7 and in Note 1 to theConsolidated Financial Statements in Item 8, which are incorporated herein by reference.

Management of HP’s overall consumer-related sales and marketing activities resides in IPG.Accordingly, IPG leads our cross-segment focus on integrated consumer products and digital imagingand entertainment products in particular, as well as our annual consumer product launch for the back-to-school and holiday season. IPG also manages consumer channel relationships with approximately20,000 third-party retail locations for imaging and printing products, as well as other consumer productsincluding consumer PCs, which provides for a bundled sale opportunity between PCs and IPG products.In addition, IPG manages direct consumer sales through www.hp.com and through www.hpshopping.com,a wholly-owned subsidiary that supports online sales.

A cross-segment organization called the Customer Solutions Group (‘‘CSG’’) manages commercialsales and marketing activities. HP created CSG in May 2004 in order to provide a single organizationto manage enterprise, SMB and public sector customer relationships, as well as to simplify salesprocesses across our segments to improve speed and effectiveness. Key CSG initiatives during 2004included a focus on improving the mix of skills in our sales force, enhancing the efficiency of bid deskrequests by speeding up our ability to bid for business, and increasing the number of higher-marginproducts and solutions sold by the sales force. CSG also oversees and coordinates sales and marketingactivities for both volume-based business such as industry-standard servers and value-based solutionssuch as Superdome. In this capacity, CSG manages our direct sales force and pre-sales technicalconsultants as well as our direct distribution activities for commercial products and go-to-marketactivities with systems integrators and ISVs. PSG manages commercial reseller channels, due largely tothe significant volume of commercial PCs that HP sells through these channels.

In addition to our separate consumer and commercial marketing and channel-managementactivities, we operate some cross-organizational efforts, such as our overall PartnerONE channelincentive program, while the separate product groups manage some activities such as our OEMrelationships.

Manufacturing and Materials

Our manufacturing operations consist of manufacturing finished products from components andsub-assemblies that we acquire from a wide range of vendors. In addition to our own manufacturingoperations, we utilize a number of contract manufacturing (‘‘CM’’) companies around the world tomanufacture HP-designed products. The use of CM companies is intended to generate cost efficienciesand reduce time to market for certain HP-designed products. Third-party OEMs manufacture someHP-branded products that we purchase and resell under the HP brand.

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We utilize two primary methods of fulfilling demand for products: building products to order(‘‘BTO’’) and configuring products to order (‘‘CTO’’). We employ BTO capabilities to maximizemanufacturing efficiencies by producing high volumes of basic product configurations. CTO permitsconfiguration of units to the particular hardware and software customization requirements of certaincustomers. Our inventory management and distribution practices in both BTO and CTO seek tominimize inventory holding periods by taking delivery of the inventory and manufacturing immediatelyprior to the sale or distribution of products to our customers.

We purchase materials, supplies and product subassemblies from a substantial number of vendors.For many of our products, we have existing alternate sources of supply, or such sources are readilyavailable. However, we do rely on sole sources for laser printer engines and parts for products withshort life cycles (although some of these sources have operations in multiple locations). We aredependent upon Intel as a supplier of processors and static random access memory (RAM) andMicrosoft for various software products. However, we believe that disruptions with these supplierswould result in industry-wide dislocations and therefore would not disproportionately disadvantage usrelative to our competitors.

Like other participants in the high technology industry, we ordinarily acquire materials andcomponents through a combination of blanket and scheduled purchase orders to support ourrequirements for periods averaging 90 to 120 days. From time to time, we have experienced significantprice increases and limited availability of certain components that are not available from multiplesources. Frequently, we are able to obtain scarce components for somewhat higher prices on the openmarket, which may have an impact on gross margin but does not disrupt production. On occasion, weacquire component inventory in anticipation of supply constraints or enter into longer-term pricingcommitments with vendors to improve the priority and availability of supply. See ‘‘Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Factors that Could AffectFuture Results—We depend on third party suppliers, and our revenue and gross margin could suffer ifwe fail to manage supplier issues properly’’ in Item 7, which is incorporated herein by reference.

International

Our products and services are available worldwide. We believe this geographic diversity allows usto meet demand on a worldwide basis for both consumer and enterprise customers, draws on businessand technical expertise from a worldwide workforce, provides stability to our operations, allows us todrive economies of scale, provides revenue streams to offset geographic economic trends and offers usan opportunity to exploit new markets for maturing products. In addition, we believe that future growthis dependent in part on our ability to develop products and sales models that target developingcountries. In this regard, we believe that our broad geographic presence and our e-Inclusion program,which is focused on developing products and business models that will bring technology to developingcountries, will give us a solid base to build upon for such future growth.

A summary of our domestic and international net revenue and net property, plant and equipmentis set forth in Note 18 to the Consolidated Financial Statements in Item 8, which is incorporated hereinby reference. Over 60% of our overall net revenue in fiscal 2004 came from outside of the UnitedStates. A majority of our net revenue originating outside the United States was from customers otherthan foreign governments.

For a discussion of risks attendant to HP’s foreign operations, see ‘‘Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Factors That Could Affect FutureResults—Due to the international nature of our business, political or economic changes or other factorscould harm our future revenue, costs and expenses and financial condition’’ in Item 7, ‘‘Quantitativeand Qualitative Disclosure about Market Risk’’ in Item 7A and Note 8 to the Consolidated FinancialStatements in Item 8, which are incorporated herein by reference.

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Research and Development

Our development efforts are focused on designing and developing products, services and solutionsthat anticipate customers’ changing needs and desires and emerging technological trends. Our effortsare also focused on identifying the areas where we believe we can make a unique contribution and theareas where partnering with other leading technology companies will maximize our cost structure andour customers’ experiences. Key research focus areas include:

• Next-generation computing: Using industry-standard components to develop an adaptive ITinfrastructure that automatically and securely moves, balances, shares and reuses computingresources as needed.

• Imaging and printing growth: Expanding HP technologies into new areas, such as commercialprinting; developing smarter cameras, video projectors, 3D imaging, enhanced device connectivityand other technologies for innovative imaging applications.

• Industry collaborations: Developing solutions for customers in fields undergoing rapid change,such as mobile devices and infrastructure for life sciences and education.

• Technologies for services: Developing architecture, tools, platforms and software in the areas ofadaptive infrastructure and services, as well as creating platforms, services and solutions thatprovide end-to-end security.

• Consumer systems: Creating architectures that enable systems and devices to work bettertogether, including developing and driving open, cross-industry standards.

• Emerging and transformative technologies: Continuing to push the boundaries of science in areassuch as the development of nanoscale molecular computing and flexible displays as well asdesigning product features targeted at making technology affordable and useful for customers inemerging markets.

HP Labs, together with the various research and development groups within the five principalbusiness segments, are responsible for our research and development efforts. HP Labs is part of ourCorporate Investments segment.

Expenditures for research and development in fiscal 2004 were $3.5 billion, as compared to$3.7 billion in fiscal 2003 and $3.4 billion in fiscal 2002. We anticipate that we will continue to havesignificant research and development expenditures in the future to provide a continuing flow ofinnovative, high-quality products and services to maintain and enhance our competitive position.

For a discussion of risks attendant to our research and development activities, see ‘‘Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Factors That Could AffectFuture Results—If we cannot continue to develop, manufacture and market products and services thatmeet customer requirements for innovation and quality, our revenue may suffer’’ in Item 7, which isincorporated herein by reference.

Patents

Our general policy has been to seek patent protection for those inventions and improvementslikely to be incorporated into our products and services or where proprietary rights will improve ourcompetitive position. At October 31, 2004, our worldwide patent portfolio included over 25,000 patents,a significant increase over the 21,000 patents we held at the end of fiscal 2003. Of these 25,000 patents,approximately 9,000 are related to IPG, with approximately 4,000 of the IPG patents related to oursupplies business.

Patents generally have a term of twenty years. As our patent portfolio has been built over time, theremaining terms on the individual patents vary. While we believe that our patents and applications are

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important for maintaining the competitive differentiation of our products and maximizing our return onresearch and development investments, no single patent is in itself essential to us as a whole or any ofour principal business segments.

In addition to developing our patents, we license intellectual property from third parties where wedeem appropriate. We have also granted and continue to grant to others licenses under patents ownedby us when we consider these arrangements to be in our interests. These license arrangements includea number of cross-licenses with third parties.

For a discussion of risks attendant to intellectual property rights, see ‘‘Management’s Discussionand Analysis of Financial Condition and Results of Operations—Factors that Could Affect FutureResults—Our revenue, cost of sales, and expenses may suffer if we cannot continue to license orenforce the intellectual property rights on which our business depends or if third parties assert that weviolate their intellectual property rights’’ in Item 7, which is incorporated herein by reference.

Backlog

We believe that backlog is not a meaningful indicator of future business prospects due to the largevolume of products delivered from shelf or channel partner inventories, the shortening of product lifecycles and the relative portion of net revenue related to our service and support businesses. Therefore,we believe that backlog information is not material to an understanding of our overall business.

Seasonality

General economic conditions have an impact on our business and financial results. From time totime, the markets in which we sell our products experience weak economic conditions that maynegatively affect sales. We experience some seasonal trends in the sale of our products and services.For example, sales to governments (particularly sales to the U.S. government) often are stronger in thethird calendar quarter, European sales often are weaker in the summer months, and consumer salesoften are stronger in the fourth calendar quarter. Demand during the spring and early summer monthsalso may be adversely impacted by market anticipation of seasonal trends. See ‘‘Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Factors that Could AffectFuture Results—Our sales cycle makes planning and inventory management difficult and futurefinancial results less predictable’’ in Item 7, which is incorporated herein by reference.

Competition

We encounter aggressive competition in all areas of our business activity. We compete primarily onthe basis of technology, performance, price, quality, reliability, brand, distribution, range of productsand services, account relationships, customer service and support, security and availability of applicationsoftware. Our reputation, the ease of use of our products, the availability of multiple softwareapplications, our Internet infrastructure offerings, and our customer training, services and support arealso important competitive factors.

The markets for each of our business segments are characterized by vigorous competition amongmajor corporations with long-established positions and a large number of new and rapidly growingfirms. Product life cycles are short, and to remain competitive we must develop new products andservices, periodically enhance our existing products and services and compete effectively on the basis ofthe factors listed above. In addition, we compete with many of our current and potential partners,including OEM that design, manufacture and often market their products under their own brandnames. The successful management of these competitive partner relationships will continue to becritical to our future success. Moreover, we anticipate that we will have to continue to adjust prices onmany of our products and services to stay competitive.

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On an overall basis we are among the largest U.S.-based companies offering our range of generalpurpose computers and personal information, imaging and printing products for industrial, scientificand business applications, and IT services. We are the leader or among the leaders in each of ourprincipal business segments.

The competitive environments in which each segment operates are described below:

Personal Systems Group. The areas in which PSG operates are intensely competitive and arecharacterized by rapid price reductions and inventory depreciation. Our primary competitor in thebranded personal computers area is Dell Inc (‘‘Dell’’), with additional competition, particularly in nichemarkets, from companies such as Toshiba Corporation, Apple Computer Inc., International BusinessMachines Corporation (‘‘IBM’’), which has announced its intention to sell a majority stake in thisbusiness to the China-based Lenovo Group (formerly known as Legend), and the merged businesses ofGateway, Inc and eMachines. In particular regions, we also experience competition from companiessuch as Acer Inc. and Fujitsu Limited, both of which are particularly strong in Europe, and the LenovoGroup, which is particularly strong in China. We also face competition from generically-branded or‘‘white box’’ manufacturers.

Imaging and Printing Group. The markets for printer hardware and associated supplies are highlycompetitive, especially with respect to pricing and the introduction of new products and features. IPG’skey competitors include Lexmark International Group Inc., Xerox Corporation (‘‘Xerox’’), Seiko EpsonCorporation, Sony Corporation of America, Canon USA, Inc. and Dell as a reseller of printer products.We are the leading imaging and printing systems provider in the world for printer hardware, printingsupplies and scanning devices. We believe that our brand recognition, reputation for quality, breadth ofproduct offerings and large customer base are important competitive advantages. We and ourcompetitors continue to develop and market new and innovative products at competitive prices and, atany given time, may set new market standards for quality, speed and function. In recent years, we andour principal competitors have regularly lowered prices on printer hardware to reach new customersand add customer value. In addition, refill and remanufactured alternatives for our supplies areavailable from independent suppliers and, although generally offering lower print quality, may beoffered at lower prices and put pressure on our supplies sales and margins. Three important areas forour growth include home management of digital imaging and printing, multi-function printers in theoffice space and digital presses in our digital publishing business. While we encounter competitorswhose current market share is greater than ours, such as Xerox in copiers and HeidelbergerDruckmaschinen Aktiengesellschaft in publishing, we believe we will provide important newcontributions in both the home and publishing environments by providing comprehensive solutions.

Enterprise Storage and Servers. The areas in which ESS operates are intensely competitive and arecharacterized by rapid and ongoing technological innovation and price reductions. Our competitorsrange from broad solutions providers such as IBM to more focused competitors such as EMCCorporation in storage, Dell in industry standard servers, and Sun Microsystems, Inc. in Unix-basedservers. Broad-based solutions providers benefit from their existing customer base and the breadth oftheir product offerings, while more focused competitors are able to concentrate their efforts onproviding the most competitive product. We believe that our important competitive advantages in thissegment include our broad range of server and storage products and related services, our global reachand our significant intellectual property portfolio and research and development capabilities, which willcontribute to further enhancements of our product offerings.

HP Services. The principal areas in which HPS competes are technology services, consulting andintegration and managed services. The support and consulting and integration markets have been undersignificant pressure as customers scrutinize their IT spending. However, this trend has benefited themanaged services business as customers attempt to reduce their IT costs and focus their resources ontheir core businesses. Our key competitors in this segment include IBM Global Services and the

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services businesses of other technology products organizations, as well as EDS Corporation and othersystems integration firms. Many of our competitors are able to offer a wide range of services through aglobal network of service providers, and some of our competitors enjoy significant brand recognition.HPS teams with many services companies to extend our reach and augment our capabilities. Ourcompetitive advantages include our global delivery organization, with a worldwide presence; our deeptechnical expertise; our diagnostic and IT management tools; and the flexibility and choice we offer ourcustomers.

Software. Our software competitors include other companies focused on providing softwaresolutions for IT management, such as BMC Software Inc, Computer Associates International Inc.,Veritas Software (which has agreed to merge with Symantec Corp.) and Mercury Interactive, as well asbroad enterprise IT companies such as IBM.

HP Financial Services. In our financing business, our competitors are captive financing companies,mainly IBM Global Financing, banks and financial institutions. We believe our competitive advantage inthis business over banks and financial institutions is our ability to finance products, services and totalsolutions.

For a discussion of risks attendant to these competitive factors, see ‘‘Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Factors That Could Affect FutureResults—The competitive pressures we face could harm our revenue, gross margin and prospects’’ inItem 7, which is incorporated herein by reference.

Environment

Certain of our operations involve the use of substances regulated under various federal, state, localand international laws relating to the environment, including those governing the discharge ofpollutants into the air and water, the management and disposal of hazardous substances and wastes andthe cleanup of contaminated sites. Many of our products are subject to various federal, state, local andinternational laws governing chemical substances in products, including those regulating themanufacture and distribution of chemical substances and those restricting the presence of certainsubstances in electronics products. We could incur substantial costs, including cleanup costs, fines andcivil or criminal sanctions, third-party damage or personal injury claims if we were to violate or becomeliable under environmental laws or if our products become non-compliant with environmental laws. Wealso face increasing complexity in our product design and procurement operations as we adjust to newand upcoming requirements relating to the materials composition of our products, including therestrictions on lead and certain other substances in electronics that will apply to specified electronicsproducts put on the market in the European Union as of July 1, 2006 (Restriction of HazardousSubstances in Electrical and Electronic Equipment Directive) and similar legislation currently proposedfor China. In addition, we also could face significant costs and liabilities in connection with producttake-back legislation. The European Union has finalized the Waste Electrical and Electronic EquipmentDirective, which makes producers of electrical goods, including computers and printers, financiallyresponsible for specified collection, recycling, treatment and disposal of past and future coveredproducts. The deadline for enacting and implementing this directive by individual European Uniongovernments was August 13, 2004 (such legislation, together with the directive, the ‘‘WEEELegislation’’), although extensions were granted in some countries. Producers are to be financiallyresponsible under the WEEE Legislation beginning in August 2005. Similar legislation may be enactedin other geographies, including federal and state legislation in the United States, the cumulative impactof which could be significant.

It is our policy to apply strict standards for environmental protection to sites inside and outside theUnited States, even if we are not subject to regulations imposed by local governments. The liability forenvironmental remediation and other environmental costs is accrued when HP considers it probable

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and can reasonably estimate the costs. Environmental costs and accruals are presently not material toour operations or financial position, and we do not currently anticipate material capital expendituresfor environmental control facilities.

Executive Officers:

Carleton S. Fiorina; age 50; Chairman and Chief Executive Officer

Ms. Fiorina serves as Chairman of the Board and Chief Executive Officer of HP. She becameChairman of the Board in September 2000 after serving as President and Chief Executive Officer andas a director since July 1999.

Ann O. Baskins; age 49; Senior Vice President, General Counsel and Secretary

Ms. Baskins was elected Senior Vice President in 2002 after serving as Vice President sinceNovember 1999. She has served as General Counsel responsible for worldwide legal matters sinceJanuary 2000. She has served as Secretary since 1999 and was Assistant Secretary from 1985 to 1999.

Gilles Bouchard; age 44; Chief Information Officer and Executive Vice President, Global Operations

Mr. Bouchard was elected Chief Information Officer and Executive Vice President inJanuary 2004. From May 2002 to December 2003, he was Senior Vice President of IPG Operations.From March 2001 to May 2002, he was Vice President and General Manager of HP’s BusinessCustomer Operations. Mr. Bouchard also served as Vice President of Worldwide Operations for HP’sPersonal Computing Organization from December 1999 to March 2001, and from June 1998 toDecember 1999 he was General Manager for the Pavilion home PC business in the Americas.

Debra L. Dunn; age 48; Senior Vice President, Corporate Affairs

Ms. Dunn was elected Senior Vice President in 2002 after serving as Vice President sinceNovember 1999. She previously held the position of General Manager of the Executive Council from1998 to 1999.

Jon E. Flaxman; age 47; Senior Vice President and Controller

Mr. Flaxman was elected Senior Vice President in 2002 after serving as Vice President andController since May 2001. From May 1999 to May 2001, he served as Vice President and ChiefFinancial Officer of the Business Customer Organization. He was first appointed a Vice President in1998.

Brian Humphries; age 31; Vice President, Investor Relations

Mr. Humphries was elected Vice President in 2004. Since July 2004, he has served as VicePresident of Investor Relations. From August 2003 to June 2004, he was Director of FinancialCommunications. From May 2002 to July 2003, Mr. Humphries was Director of Finance for IndustryStandard Servers business. Before the Compaq acquisition, he served as Compaq’s Director of InvestorRelations from May 1999 to May 2002.

Allison Johnson; age 43; Senior Vice President, Global Brand and Communications

Ms. Johnson was elected Senior Vice President in 2002. Ms. Johnson has served as Vice President,Global Brand and Communications since January 2001. From January 2000 to January 2001, she wasDirector, Global Brand and Communications. From January 1999 to January 2000, Ms. Johnson wasDirector of Marketing Communications for HP’s Enterprise Systems Division.

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Vyomesh Joshi; age 50; Executive Vice President, Imaging and Printing Group

Mr. Joshi was elected Executive Vice President in 2002 after serving as Vice President sinceJanuary 2001. He became President of the Imaging and Printing Group in February 2001. Mr. Joshialso served as Chairman of Phogenix Imaging LLC, a joint venture between HP and Kodak focused ondeveloping retail digital inkjet photo finishing equipment and supplies, until May 14, 2003, whenPhogenix was dissolved. Since 1989, he has held various management positions in IPG. From 1999 to2000, he was Vice President and General Manager of Inkjet Systems. Effective January 2005, PSG alsois reporting to Mr. Joshi.

Richard H. Lampman; age 59; Senior Vice President of Research, Director of HP Labs

Mr. Lampman was elected Senior Vice President in 2002. He has served as the director of HPLabs since 1999. Mr. Lampman has held various positions with HP since 1971, when he joined HP.

Catherine A. Lesjak; age 45; Senior Vice President and Treasurer

Ms. Lesjak was elected Senior Vice President and Treasurer in 2003. From May 2002 to July 2003,she was Vice President of Finance for Enterprise Marketing and Solutions and Vice President ofFinance for the Software Global Business Unit. From June 2000 to May 2002, Ms. Lesjak wascontroller for the Software Solutions Organization. From September 1998 to September 2000, sheserved as controller and credit manager for the Commercial Customer Organization.

Ann M. Livermore; age 46; Executive Vice President, Technology Solutions Group

Ms. Livermore was elected Executive Vice President in 2002 after serving as Vice President since1995. Since May 2004, she has led TSG. In April 2001, she became President of HPS. In October 1999,she became President of the Business Customer Organization. She was appointed President ofEnterprise Computing in April 1999. Ms. Livermore is a member of the Board of Directors of UnitedParcel Service, Inc. She is also on the board of visitors of the Kenan-Flagler Business School at theUniversity of North Carolina at Chapel Hill and the Board of Advisors at the Stanford BusinessSchool.

Marcela Perez de Alonso; age 50; Executive Vice President, Human Resources and WorkforceDevelopment

Ms. Perez was elected Executive Vice President, Human Resources and Workforce Development inJanuary 2004. From 1999 until she joined HP, Ms. Perez was Division Head of Citigroup North LatinAmerica Consumer Bank, in charge of the retail business operations of Citigroup in Puerto Rico,Venezuela, Colombia, Peru, Panama, The Bahamas, and Dominican Republic. She served as GlobalConsumer Head, Human Resources of Citigroup from 1996 to 1999.

Shane V. Robison; age 51; Executive Vice President and Chief Strategy and Technology Officer

Mr. Robison was elected Executive Vice President in 2002 following the Compaq acquisition. Hehas served as Chief Strategy and Technology Officer since May 2002. Prior to joining HP, Mr. Robisonserved as Senior Vice President, Technology and Chief Technology Officer at Compaq since 2000. Priorto joining Compaq, Mr. Robison was President of Internet Technology and Development at AT&TLabs, a technology research and development organization, a position he had held since 1999.

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Robert P. Wayman; age 59; Executive Vice President and Chief Financial Officer

Mr. Wayman has served as Executive Vice President since December 1992 and Chief FinancialOfficer of HP since 1984. Mr. Wayman is a director of CNF Inc. and Sybase Inc. He also serves as amember of the Kellogg Advisory Board to the Northwestern University School of Business.

Michael J. Winkler; age 59; Executive Vice President, Customer Solutions Group and Chief MarketingOfficer

Mr. Winkler was elected Executive Vice President in 2002 in connection with the Compaqacquisition. In August 2004, he became Executive Vice President, Customer Solutions Group. InDecember 2002, he became the Chief Marketing Officer responsible for the Global Brand andCommunications, Global Alliances and Total Customer Experience teams. Prior to joining HP,Mr. Winkler served as Executive Vice President, Global Business Units of Compaq since 2000. Prior tothat, Mr. Winkler was Senior Vice President and Group General Manager, Commercial PersonalComputing Group, a position to which he was elected in 1996. Mr. Winkler is a director of BantaCorporation.

Employees

We had approximately 151,000 employees worldwide as of October 31, 2004.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports onForm 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the SecuritiesExchange Act of 1934, as amended, are available on our website at http://investor.hp.com, as soon asreasonably practicable after HP electronically files such reports with the Securities and ExchangeCommission.

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ITEM 2. Properties.

As of October 31, 2004, we owned or leased a total of approximately 69 million square feet ofspace worldwide. We believe that our existing properties are in good condition and are suitable for theconduct of our business.

We anticipate that we will continue to obtain most of the capital necessary for expansion frominternally generated funds. Investment in new property, plant and equipment amounted toapproximately $2.1 billion in fiscal 2004, $2.0 billion in fiscal 2003 and $1.7 billion in fiscal 2002.

As of October 31, 2004, our sales and support operations occupied approximately 17 millionsquare feet, of which approximately 4 million square feet were located within the United States. Weown 38% of the space used for sales and support activities and lease the remaining 62%.

Our manufacturing plants, research and development facilities and warehouse and administrativefacilities occupied approximately 52 million square feet, of which approximately 33 million square feetwere located within the United States. We own 61% of our manufacturing, research and development,warehouse and administrative space and lease the remaining 39%. Our plants are equipped withmachinery, most of which we own and which, in part, we developed to meet the special requirements ofour manufacturing processes. At the end of fiscal 2004, we were productively utilizing the majority ofthe space in our facilities, while actively disposing of space we determined to be excess.

The property we own is not subject to any material encumbrances.

As indicated above, we have seven business segments: PSG, IPG, ESS, HPS, HPFS, Software andCorporate Investments. Because of the interrelation of these segments, a majority of these segmentsuse substantially all of the properties at least in part, and we retain the flexibility to use each of theproperties in whole or in part for each of the segments.

Our principal executive offices, including global headquarters, are located at 3000 Hanover Street,Palo Alto, California, United States of America. The locations of our headquarters of geographicoperations at October 31, 2004 were as follows:

Headquarters of Geographic Operations

Americas Europe, Middle East, Africa Asia Pacific, including Japan

Houston, Texas Geneva, Switzerland Singapore

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The locations of our major product development and manufacturing facilities and HP Labs atOctober 31, 2004 were as follows:

Product Development and Manufacturing

Americas Europe, Middle East, Africa Hewlett-Packard Laboratories

Cupertino, Fremont, Ontario, Palo Herrenberg, Germany Palo Alto, CaliforniaAlto, Roseville, San Diego andWoodland, California Dublin, Ireland Cambridge, Massachusetts

Fort Collins and Loveland, Colorado Rehovot, Israel Bangalore, India

Boise, Idaho Amersfoort and Gouda, The Haifa, IsraelNetherlands

Indianapolis, Indiana Tokyo, JapanBarcelona, Spain

Andover, Littleton and Marlboro, Bristol, United KingdomMassachusetts Bristol, Erskine and Inchinnan,

United KingdomOmaha, Nebraska

Asia Pacific, including JapanNashua, New Hampshire

Rydalmere, AustraliaCorvallis, Oregon

Shanghai, ChinaMemphis and Nashville, Tennessee

Bangalore, IndiaDallas, Houston and Richardson,

Akishima, JapanTexas

SingaporeChester and Sandston, Virginia

Vancouver, Washington

Aguadilla, Puerto Rico

Campinas, Brazil

Guadalajara, Mexico

ITEM 3. Legal Proceedings.

Pending Litigation and Proceedings

Intergraph Hardware Technologies Company v. HP, Dell & Gateway is a lawsuit filed in United StatesDistrict Court for the Eastern District of Texas, Marshall County, on December 16, 2002. Gateway andDell are no longer defendants in this matter. The suit accuses HP of infringement of three patentsrelated to cache memory (the ‘‘Clipper Patents’’). Intergraph Hardware Technologies Company(‘‘Intergraph’’) seeks damages constituting a ‘‘reasonable royalty’’ (as well as enhanced damages), aninjunction, prejudgment interest, costs and attorneys’ fees. The complaint was served on HP on April 1,2003. On May 21, 2003, HP answered and counterclaimed for a declaratory judgment that the patentsare not infringed by HP and that the patents are invalid and unenforceable. Fact discovery closed onOctober 27, 2004. A claim construction hearing was held on May 7, 2004, and the court issued a rulingon the claim construction hearing on July 1, 2004. Jury selection is scheduled to begin on February 7,2005, and trial is scheduled to begin on February 21, 2005. Expert discovery is ongoing. On May 7,2004, Intergraph sued HP in United States District Court for the Eastern District of Texas, TylerCounty, for infringement of another patent related to cache memory management. Intergraph seeks aninjunction, declaratory relief and attorneys’ fees, but not damages. HP answered and counterclaimed,

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asserting Intergraph’s infringement of two HP software patents. HP seeks damages and an injunction.Trial in that matter is scheduled to begin on April 11, 2005 for Intergraph’s claims, and on October 24,2005 for HP’s claims. Intergraph has obtained significant settlements from other defendants, rangingfrom $10 million (Advanced Micro Devices) to $300 million (Intel Corporation), relating to suchdefendants’ direct use of the Clipper Patents. However, the ultimate resolution of these proceedingsand the financial impact on HP, which will depend in part on determinations as to the useful life of thepatents, what would constitute ‘‘reasonable royalty’’ rates, the allocation of any amounts paid foraccounting purposes, the timing of any payments and the units impacted, remains uncertain.

On May 28, 2003, HP sued Intergraph Corporation, the parent of Intergraph, in United StatesDistrict Court for the Northern District of California, San Francisco Division, accusing IntergraphCorporation of infringement of four HP patents related to computer-aided design, video displaytechnology and information retrieval technology. Intergraph answered and counterclaimed fordeclaratory relief on October 14, 2003. A claim construction hearing was held on October 22, 2004, andthe court issued its claim construction rulings on January 3, 2005. HP expects trial to begin inmid-2005. HP seeks damages, an injunction, prejudgment interest, costs and attorneys’ fees. On April 1,2004, HP sued Intergraph Corporation in the Mannheim State Court in Mannheim, Germany, andrelated proceedings in Germany are pending, for infringement of two European Union patents relatedto computer-aided design. HP seeks damages, an injunction and costs. Trial took place inNovember 2004, and the court dismissed HP’s action based on a determination of Intergraph’snoninfringement on January 7, 2005. On April 19, 2004, HP sued Z/I Imaging, a subsidiary ofIntergraph Corporation, and Intergraph Corporation, in United States District Court for the District ofDelaware, accusing Z/I Imaging of infringement of two patents related to image scanning technology.Intergraph answered and counterclaimed for declaratory relief on May 28, 2004. Trial is scheduled tobegin on December 4, 2005. Also on April 19, 2004, HP sued Intergraph Corporation in United StatesDistrict Court for the Eastern District of Texas for infringement of one patent relating to computer-aided design. Intergraph answered and counterclaimed for declaratory relief on May 13, 2004. Juryselection is expected to begin in December 2005. In both cases, HP seeks damages, an injunction,prejudgment interest, costs and attorneys’ fees.

Copyright levies. Proceedings are being pursued against HP in certain European Union (‘‘EU’’)member countries seeking to impose levies upon equipment (such as printers and multi-functiondevices) alleging that these devices enable producing private copies of copyrighted materials.

Two non-binding arbitration proceedings instituted in June 2001 and June 2002, respectively, werebrought in Germany before the arbitration board of the Patent and Trademark Office.VerwertungsGesellschaft Wort (‘‘VG Wort’’), a collection agency representing certain copyright holders,brought the proceedings against HP, which relate to whether and to what extent copyright levies shouldbe imposed in accordance with copyright laws implemented in Germany relating to multi-functiondevices and printers that allegedly enable the production of copies by private persons. The publishedtariffs on these devices in Germany range from 10 to 613.56 euros per unit. Non-binding proposalswere presented in the proceedings, both of which HP rejected. In May 2004, VG Wort filed a lawsuitagainst HP in the Stuttgart Civil Court in Stuttgart, Germany seeking levies on multi-function devices(‘‘MFDs’’). A decision in this matter was issued on December 22, 2004. The court held that HP isliable for payments regarding photocopiers sold in Germany, but did not determine the exact amountpayable per unit. The court further stated that HP should furnish information regarding the number ofMFDs sold in Germany up to December 2001 and the number of copies per minute that various MFDscan produce. Finally, the court held that a levy of a maximum of 1.5% of the price was due on thebundle ‘‘LJ8150 MFP plus Scanner-Module C4166B,’’ and that the individual elements of this bundlewere not part of the claim. The deadline for filing an appeal of this decision is January 31, 2005. InJuly 2004, VG Wort filed a separate lawsuit against HP in the Stuttgart Civil Court seeking levies onprinters. A decision in this matter was issued on December 22, 2004. The court held that HP is liable

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for payments regarding all printers using ASCII code sold in Germany, but did not determine theamount payable per unit. The court further stated that HP should furnish information regarding thenumber of printers sold in Germany since April 2001 and the number of copies per minute that variousprinters can produce. The deadline for filing an appeal of this decision is January 27, 2005. InSeptember 2003, VG Wort filed a lawsuit against Fujitsu Siemens Computer GmbH (‘‘FSC’’) in MunichState Court seeking levies on PCs. This is an industry test case in Germany, and HP has undertaken tobe bound by a final decision. A decision in this matter was issued on December 23, 2004 stating thatPCs are subject to a levy and that FSC should furnish information as to the number of PCs sold inGermany since January 1, 2001. Further, FSC must pay 12 euros plus compound interest for each PCsold in Germany from March 24, 2001. FSC has indicated that it will appeal the decision.

In April 2001, the Organization for the Collective Management of Works of Literature, theOrganization for the Collective Management of Works of Plastic Arts and their Applications, and theOrganization for the Collective Management and Protection of Intellectual Property of Photographersbrought five proceedings against HP Hellas EPE and Compaq Computer EPE in Greece relating towhether a levy of 2% should be payable upon computer products, including central processing units,monitors, keyboards, mice, diskettes, printers, scanners and related items in accordance with Greekcopyright law, before its amendment in September 2002. These proceedings are pending before theCourt of First Instance of Athens or before the Court of Appeal of Athens.

In April 1998, Auvibel s.c.r.l., a Belgian collection agency, filed an appeal of a judgment in HP’sfavor with the Court of Appeal in Brussels relating to a dispute as to whether and to what extentcopyright levies should be imposed upon CD-writers and CD media. The case has been removed fromthe court’s list of pending cases, without prejudice to the parties’ right to reinstate the matter.

The total levies due, if imposed, would be based upon the number of products sold, and theper-product amounts of the levies, which will vary. Some EU member countries that do not yet havelevies on digital devices are expected to implement similar legislation to enable them to extend existinglevy schemes, while some other EU member countries are expected to limit the scope of levy schemesand applicability in the digital hardware environment. HP, other companies and various industryassociations are opposing the extension of levies to the digital environment and advocatingcompensation to rights holders through digital rights management systems. Based on such opposition,HP’s assessments of the merits of various proceedings and HP’s estimates of the units impacted andlevies, HP has accrued amounts that it believes are adequate to address the matters described above.However, the ultimate resolution of these matters, including the number of units impacted, the amountof levies imposed in various jurisdictions and the availability of HP to recover such amounts throughincreased prices, remains uncertain.

Alvis v. HP is a nationwide defective product consumer class action that was filed in state court inJefferson County, Texas by a resident of Eastern Texas in April 2001. In February 2000, a similar suitcaptioned LaPray v. Compaq was filed in state court in Jefferson County, Texas. The basic allegation isthat HP and Compaq sold computers containing floppy disk controllers that fail to alert the user tocertain floppy disk controller errors. That failure is alleged to result in data loss or data corruption.The complaints in Alvis and LaPray seek injunctive relief, declaratory relief, unspecified damages andattorneys’ fees. In July 2001, a nationwide class was certified in the LaPray case, which the BeaumontCourt of Appeals affirmed in June 2002. In May 2004, the Texas Supreme Court reversed thecertification of the nationwide class in the LaPray case and remanded the case to the trial court. Thetrial court has not set a new class certification hearing. A class certification hearing was held on July 1,2003 in the Alvis case, and the court granted plaintiffs’ motion to certify a nationwide class action. HPfiled an appeal of that certification with the 9th Court of Appeals in Beaumont, Texas, which heardoral arguments on HP’s appeal and received a supplemental briefing based upon the LaPray opinionfrom the Texas Supreme Court. On August 31, 2004, the 9th Court of Appeals in Texas reversed thelower court’s decision certifying a nationwide class and remanded the case to the trial court. A class

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certification hearing was held on January 6, 2005. On January 12, the court notified the parties that itwill certify a Texas-wide class action for injunctive relief only. On June 4, 2003, Barrett v. HP and Griderv. Compaq were each filed in state court in Cleveland County, Oklahoma, with factual allegationssimilar to those in Alvis and LaPray. The complaints in Barrett and Grider seek, among other things,specific performance, declaratory relief, unspecified damages and attorneys’ fees. On November 5, 2003,the court heard HP’s motion to dismiss Barrett v. HP and Grider v. Compaq, which motion wassubsequently denied. On December 22, 2003, the court entered an order staying both the Barrett andGrider cases until the conclusions of the Alvis and LaPray actions. On July 28, 2004, the Court liftedthe stay in Grider, but took under advisement the plaintiff’s motion to lift the stay in Barrett. OnNovember 5, 2004, Scott v. HP was filed in state court in San Joaquin County, California, with factualallegations similar to those in Alvis and LaPray. The complaint in Scott seeks class certification,injunctive relief, unspecified damages (including punitive damages), restitution, costs and attorneys’fees. In addition, the Civil Division of the Department of Justice, the General Services AdministrationOffice of Inspector General and other Federal agencies are conducting an investigation of allegationsthat HP and Compaq made or caused to be made false claims for payment to the United States forcomputers known by HP and Compaq to contain defective parts or otherwise to perform in a defectivemanner relating to the same alleged floppy disk controller errors. HP agreed with the Department ofJustice to extend the statute of limitations on its investigation until June 6, 2005. HP is cooperatingfully with this investigation.

On December 27, 2001, Cornell University and the Cornell Research Foundation, Inc. filed an actionagainst HP in United States District Court for the Northern District of New York alleging that HP’sPA-RISC 8000 family of microprocessors, and servers and workstations incorporating those processors,infringe a patent assigned to Cornell Research Foundation, Inc. that describes a way of executingmicroprocessor instructions. HP has answered and counterclaimed. This action seeks declaratory andinjunctive relief and unspecified damages. On March 26, 2004, the court issued a ruling interpreting thedisputed claim terms in the patent at issue. Discovery is ongoing, and no trial date has been set.

HP v. EMC Corporation (‘‘EMC’’) is a lawsuit filed in United States District Court for theNorthern District of California on September 30, 2002, in which HP accuses EMC of infringing sevenHP patents. HP seeks damages, an injunction, prejudgment interest, costs and attorneys’ fees. OnJuly 21, 2003, EMC filed its answer and a cross-claim asserting, among other things, that numerous HPstorage, server and printer products infringe six EMC patents. EMC seeks a permanent injunction aswell as unspecified monetary damages, costs and attorneys’ fees for patent infringement. The courtissued an order construing disputed claim terms on June 23, 2004. Discovery is ongoing. Trial isexpected in late 2005 or early 2006. On November 27, 2004, HP filed a second lawsuit in United StatesDistrict Court for the Northern District of California, in which HP accuses additional models of certainEMC products of infringing the same seven HP patents. HP seeks damages, an injunction, prejudgmentinterest, costs and attorneys’ fees. EMC also filed suit against StorageApps, a company acquired by HPin fiscal 2001, in United States District Court in Worcester, Massachusetts on October 20, 2000. Thesuit accused StorageApps of infringement of EMC patents relating to storage devices, and sought apermanent injunction as well as unspecified monetary damages for patent infringement. The court helda hearing to construe the disputed claims terms of EMC’s three patents in the suit on July 21-22, 2003and issued its claim construction ruling on September 12, 2003. Following a trial in May 2004, the juryfound that three of EMC’s patents are valid and infringed. The damages phase of the litigation hascommenced, and a trial on the issue of damages is scheduled to begin on February 17, 2005. HP isappealing the judgment of liability.

Neubauer, et al. v. Intel Corporation, Hewlett-Packard Company, et al. and Neubauer, et al. v. CompaqComputer Corporation are separate lawsuits filed on June 3, 2002 in state court in Madison County,Illinois, alleging that HP and Compaq (along with Intel) misled the public by suppressing andconcealing the alleged material fact that systems that use the Intel Pentium 4 processor are less

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powerful and slower than systems using the Intel Pentium III processor and processors made by acompetitor of Intel. The court in the HP action has certified an Illinois class as to Intel but denied anationwide class. The plaintiffs seek unspecified damages, restitution, attorneys’ fees and costs andcertification of a nationwide class against HP and Compaq. The class action certification hearingsagainst HP and Compaq have not yet been scheduled. In each action, HP and Compaq have filedmotions to dismiss the cases, which the court has denied. HP and Compaq also have filed forum nonconveniens motions, which are pending. Skold, et al. v. Intel Corporation and Hewlett-Packard Companyis a lawsuit in state court in Alameda County, California to which HP was joined on June 14, 2004,based upon factual allegations similar to those in the Neubauer cases. The plaintiffs seek unspecifieddamages, restitution, attorneys’ fees and cost and certification of nationwide class.

Forgent Networks v. HP et al. is a lawsuit filed on April 22, 2004 against HP as well as 30 othercompanies in United States District Court for the Eastern District of Texas. The complaint accuses HPof patent infringement with respect to HP’s products that implement JPEG compression. JPEG is astandard for data compression used in HP’s PCs, scanners, digital cameras, PDAs, and non-photo-printers. Forgent seeks unspecified damages, an injunction, interest, costs and attorneys’ fees.Separately, HP has alerted government regulators of Forgent’s participation in the JPEGstandardization process and current licensing activities. Trial has been set for October 2005.

Hewlett-Packard Development Company, LP v. Gateway, Inc. is a lawsuit filed on March 24, 2004 byHP’s wholly-owned subsidiary, Hewlett-Packard Development Company, LP (‘‘HPDC’’), againstGateway, Inc. in U.S. District Court in the Southern District of California, alleging infringement of sixpatents relating to various notebook, desktop and enterprise computer technologies. On April 2, 2004,HPDC filed an amended complaint, adding infringement allegations for four additional patents. HPDCseeks an injunction, unspecified monetary damages, interest and attorneys’ fees. On May 10, 2004,Gateway filed an answer and a counterclaim, alleging infringement of five Gateway patents relating tocomputerized television, wireless, computer monitoring and computer expansion card technologies.Gateway seeks an injunction, unspecified monetary damages, interest and attorneys’ fees. Claimconstruction is scheduled to begin on January 24-25, 2005. On May 6, 2004, HPDC and HP filed acomplaint with the U.S. International Trade Commission (‘‘ITC’’) against Gateway, alleginginfringement of seven additional computer technology patents. HP seeks an injunction. On October 21,2004, HPDC filed suit in the United States District Court for the Western District of Wisconsin againsteMachines, a wholly-owned subsidiary of Gateway, alleging infringement of five HPDC patents relatingto personal and desktop computers, of which three patents remain in suit. HPDC seeks an injunction,unspecified monetary damages, interest and attorneys’ fees.

On July 2, 2004, Gateway filed a complaint with the ITC against HP, alleging infringement of threepatents relating to audio control, imaging and computerized television technologies. Gateway seeks aninjunction. Claim construction is scheduled to begin on February 10-11, 2005. Also on July 2, 2004,Amiga Development LLC (‘‘Amiga’’), an entity affiliated with Gateway, filed a lawsuit against HP inthe Eastern District of Texas, alleging infringement of three patents relating to computer monitoring,imaging and decoder technologies. Gateway seeks an injunction, unspecified monetary damages,interest and attorneys’ fees. HP and HPDC have answered and counterclaimed, alleging infringementby Amiga and Gateway of four HPDC patents related to personal computer technology. On August 18,2004, Gateway filed a declaratory relief action against HPDC in the United States District Court forthe Southern District of California seeking a declaration of non-infringement and invalidity of theabove-referenced four HPDC patents relating to personal computer technology. HPDC answered andcounterclaimed and alleged infringement of the same four patents. HP seeks an injunction, unspecifiedmonetary damages, interest and attorneys’ fees. Claim construction is scheduled to begin inJanuary 2005.

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Hanrahan v. Hewlett-Packard Company and Carleton Fiorina is a lawsuit filed on November 3, 2003,in the United States District Court for the District of Connecticut on behalf of a putative class ofpersons who sold common stock of HP during the period from September 4, 2001 throughNovember 5, 2001. The lawsuit seeks unspecified damages and generally alleges that HP andMs. Fiorina violated the federal securities laws by making statements during this period which weremisleading in failing to disclose that Walter B. Hewlett would oppose the proposed acquisition ofCompaq by HP prior to Mr. Hewlett’s disclosure of his opposition to the proposed transaction. Amotion to transfer the action to federal court in California is pending, and no lead plaintiff has yetbeen appointed.

Stevens v. HP (renamed as Erickson v. HP) is an unfair business practices consumer class actionfiled in the Superior Court of California in Riverside County on July 31, 2000. Consumer class actionlawsuits have been filed, in coordination with the original plaintiffs, in 33 additional jurisdictions. Thevarious plaintiffs throughout the country claim to have purchased different models of HP inkjetprinters. The basic factual allegation of these actions is that affected consumers who purchased HPprinters received half-full or ‘‘economy’’ ink cartridges instead of full cartridges. Plaintiffs claim thatHP’s advertising, packaging and marketing representations for the printers led the consumers to believethey would receive full cartridges. These actions seek injunctive relief, disgorgement of profits,compensatory damages, punitive damages and attorneys’ fees under various state unfair businesspractices statutes and common law claims of fraud and negligent misrepresentation. In the initialCalifornia matter, the court granted summary judgment in HP’s favor and denied class certification. InOctober of 2003, the California appellate court affirmed the lower court’s decisions and dismissedplaintiff’s appeal. The matter was certified as a class action in North Carolina state court, where it wasfiled as Hughes v. Hewlett-Packard Company. HP prevailed at the trial of this case, which concluded inSeptember 2003. The litigation is not in trial in other jurisdictions, and the other cases have not beencertified as class actions. Plaintiffs’ counsel in all 33 jurisdictions have signed a dismissal agreement,which provides that all of the cases will be dismissed. Thus far twenty-one of the actions have beendismissed.

Digwamaje et al. v. Bank of America et al. is a purported class action lawsuit that names HP andnumerous other multinational corporations as defendants. It was filed on September 27, 2002 in UnitedStates District Court for the Southern District of New York on behalf of current and former SouthAfrican citizens and their survivors who suffered violence and oppression under the apartheid regime.The lawsuit alleges that HP and other companies helped perpetuate, and profited from, the apartheidregime during the period from 1948-1994 by selling products and services to agencies of the SouthAfrican government. Claims are based on the Alien Tort Claims Act, the Torture Protection Act, theRacketeer Influenced and Corrupt Organizations Act and state law. The complaint seeks, among otherthings, an accounting, the creation of a historic commission, compensatory damages in excess of$200 billion, punitive damages in excess of $200 billion, costs and attorneys’ fees. On November 29,2004, the court dismissed the plaintiffs’ complaint. On December 23, 2004, the plaintiffs appealed thedecision to the United States Court of Appeals for the Second Circuit.

In May 2002, the European Commission of the EU publicly stated that it was consideringconducting an investigation into OEM activities concerning the sales of printers and supplies toconsumers within the EU. The European Commission contacted HP requesting information on theprinting systems businesses. HP is cooperating fully with this inquiry.

In March 2003, the Korea Fair Trade Commission commenced an investigation of the Koreanprinting and supplies market. The Korea Fair Trade Commission contacted HP requesting informationon its printing systems business. A hearing is expected to be held in 2005. HP is cooperating fully withthis inquiry.

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The Government of Canada conducted cost audits of certain contracts between Public Works andGovernment Services Canada (‘‘PWGSC’’) and each of Compaq Canada Corp. and Hewlett-Packard(Canada) Co. relating to services provided to the Canadian Department of National Defence (‘‘DND’’).Compaq Canada Corp. was combined with Hewlett-Packard (Canada) Co. following HP’s acquisition ofCompaq. HP cooperated fully with the audit and has conducted its own inquiry, sharing the results ofits investigation with PWGSC and DND. On May 14, 2004, HP announced that it had resolved thedispute with the Government of Canada. HP Canada agreed to reimburse the Government of Canadathe sum of CDN$146 million (approximately US$105 million), an amount determined by both partiesto be appropriate upon investigation. HP recorded $70 million in the second quarter of fiscal 2004 andhad recorded $35 million in the prior fiscal year. HP determined that it was important for HP to honorits contractual obligations, rather than engage in protracted litigation with the Government of Canada,despite the lack of evidence that HP employees derived any improper benefit from the complex schemedesigned to exploit both parties. HP has initiated proceedings to recover these funds from responsibleindividuals, and continues to consider further proceedings against others to recover additional funds.

HP is involved in lawsuits, claims, investigations and proceedings, including those identified above,consisting of intellectual property, commercial, securities, employment, employee benefits andenvironmental matters, which arise in the ordinary course of business. In accordance with SFAS No. 5,‘‘Accounting for Contingencies,’’ HP makes a provision for a liability when it is both probable that aliability has been incurred and the amount of the loss can be reasonably estimated. HP believes it hasadequate provisions for any such matters. HP reviews these provisions at least quarterly and adjuststhese provisions to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, andother information and events pertaining to a particular case. Based on its experience, HP believes thatany damage amounts claimed in the specific matters discussed above are not a meaningful indicator ofHP’s potential liability. Litigation is inherently unpredictable. However, HP believes that it has validdefenses with respect to legal matters pending against it. Nevertheless, it is possible that cash flows orresults of operations could be materially affected in any particular period by the unfavorable resolutionof one or more of these contingencies.

Environmental

HP is party to, or otherwise involved in, proceedings brought by United States or stateenvironmental agencies under the Comprehensive Environmental Response, Compensation andLiability Act (‘‘CERCLA’’), known as ‘‘Superfund,’’ or state laws similar to CERCLA. HP is alsoconducting environmental investigations or remediations at several current or former operating sitespursuant to administrative orders or consent agreements with state environmental agencies. It is ourpolicy to apply strict standards for environmental protection to sites inside and outside the UnitedStates, even if not subject to regulations imposed by local governments. The liability for environmentalremediation and other environmental costs is accrued when it is considered probable and the costs canbe reasonably estimated. Historically, environmental costs have not been material to our operations orfinancial position.

ITEM 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

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PART II

ITEM 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities.

Information regarding the market prices of HP common stock and the markets for that stock maybe found in the ‘‘Quarterly Summary’’ in Item 8 and on the cover page of this Form 10-K, respectively,which are incorporated herein by reference. We have paid cash dividends each fiscal year since 1965.The current rate is $0.08 per share per quarter. As of December 31, 2004, there were approximately158,246 stockholders of record. Additional information concerning dividends may be found in ‘‘SelectedFinancial Data’’ in Item 6 and in Item 8, which are incorporated herein by reference.

Equity Compensation Plan Information

Information regarding HP’s equity compensation plans, including both stockholder approved plansand plans not approved by stockholders, is set forth in the section entitled ‘‘Executive Compensation—Equity Compensation Plan Information’’ in HP’s Notice of Annual Meeting of Shareowners and ProxyStatement, to be filed within 120 days after Registrant’s fiscal year end of October 31, 2004 (the ‘‘ProxyStatement’’), which information is incorporated herein by reference.

Recent Sales of Unregistered Securities

On September 21, 2004 and October 27, 2004, HP issued a total of 2,350 shares of unregisteredHP common stock to two former employees of Indigo N.V. (‘‘Indigo’’) upon the exercise of optionsassumed by HP in connection with HP’s acquisition of Indigo, for an aggregate purchase price of$19,528. HP previously reported other sales of unregistered HP common stock during the 2004 fiscalyear in HP’s Quarterly Reports on Form 10-Q. The foregoing purchases and sales were exempt fromregistration under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof, on thebasis that the transactions did not involve a public offering.

Issuer Purchases of Equity Securities

Total Number ofShares Purchased as Approximate Dollar Value of

Total Number Average Part of Publicly Shares that May Yet Beof Shares Price Paid Announced Purchased under the

Period Purchased per Share Plans or Programs Plans or Programs

Month #1(August 2004) . . . . . . . . . . . . . . . . 10,594,700 $17.59 10,594,700 $1,914,381,036

Month #2(September 2004) . . . . . . . . . . . . . . 101,659,945 $18.12 101,659,945 $3,072,420,529

Month #3(October 2004) . . . . . . . . . . . . . . . . 9,500,000 $18.56 9,500,000 $2,896,069,320

Total . . . . . . . . . . . . . . . . . . . . . . . . . 121,754,645 $18.11 121,754,645

HP repurchased shares in the fourth quarter of fiscal 2004 under an ongoing systematic programto manage the dilution created by shares issued under employee stock plans and also to return cash tostockholders. This program authorizes repurchases in the open market or in private transactions.During fiscal year 2004 HP’s Board of Directors authorized $5.0 billion for future repurchases ofoutstanding common stock, including authorization to repurchase $3.0 billion of HP shares during thefourth quarter that HP announced on September 20, 2004. Shares repurchased in the fourth quarter offiscal 2004 included open market repurchases of 31 million shares for $555 million, 72 million sharesfor $1.3 billion under an accelerated share repurchase program with an investment bank that HP

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announced on September 20, 2004 (the ‘‘Accelerated Purchase’’) and 19 million shares for $350 millionfrom the David and Lucile Packard Foundation (the ‘‘Packard Foundation’’) under the terms of amemorandum of understanding dated September 9, 2002 and amended and restated September 17,2004 that, among other things, prices the repurchases by reference to the volume weighted-averageprice for composite New York Stock Exchange transactions on trading days in which a repurchaseoccurs. Both the Accelerated Repurchase and the repurchases from the Packard Foundation areincluded in the totals in the table above.

The Accelerated Purchase occurred on September 20, 2004 and the program was completed inNovember 2004, which is in the first quarter of fiscal 2005. Upon completion of the program, HP paida $51 million price adjustment based on the difference between the $18.82 weighted average price ofthe open market stock purchases by the investment bank and the initial purchase price of $18.11 pershare. The price adjustment also included certain amounts reflecting the investment bank’s carryingcosts or benefits from purchasing shares at prices other than the initial price and the investment bank’sbenefits from receiving the $1.3 billion payment in advance of its purchases.

As of October 31, 2004, HP had remaining authorization of approximately $2.9 billion for futureshare repurchases.

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ITEM 6. Selected Financial Data.

The information set forth below is not necessarily indicative of results of future operations, andshould be read in conjunction with Item 7, ‘‘Management’s Discussion and Analysis of FinancialCondition and Results of Operations,’’ and the Consolidated Financial Statements and notes theretoincluded in Item 8, ‘‘Financial Statements and Supplementary Data,’’ of this Form 10-K, which areincorporated herein by reference, in order to understand further the factors that may affect thecomparability of the financial data presented below.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIESSelected Financial Data(1)

For the fiscal years ended October 31,

2004 2003 2002 2001 2000

In millions, except per share amounts

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $79,905 $73,061 $56,588 $45,226 $48,870Earnings (loss) from operations(2) . . . . . . . . . . . . . . 4,227 2,896 (1,012) 1,439 4,025Net earnings (loss) from continuing operations

before cumulative effect of change in accountingprinciple(2)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,497 2,539 (903) 680 3,561

Net earnings (loss) per share from continuingoperations before cumulative effect of change inaccounting principle:(2)(3)(4)

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.16 $ 0.83 $ (0.36) $ 0.35 $ 1.80Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.15 0.83 (0.36) 0.35 1.73

Cumulative effect of change in accounting principle,net of taxes(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — (272) —

Net loss per share for cumulative effect of change inaccounting principle, net of taxes:(4)

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — (0.14) —Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — (0.14) —

Cash dividends declared per share(4) . . . . . . . . . . . . 0.32 0.32 0.32 0.32 0.32At year-end:

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $76,138 $74,716 $70,710 $32,584 $34,009Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 4,623 6,494 6,035 3,729 3,402

(1) HP’s Consolidated Financial Statements and notes thereto reflect the acquisition of Compaq,which occurred on May 3, 2002. The occurrence of the acquisition in the middle of fiscal 2002affects the comparability of fiscal 2004 and 2003 financial information to prior fiscal years. Certainother amounts have been reclassified to conform to the current year presentation.

(2) Earnings (loss) from operations includes the following items:

2004 2003 2002 2001 2000

In millions

Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . $ 114 $ 800 $1,780 $ 384 $ 102In-process research and development charges . . . . . . 37 1 793 35 —Amortization of purchased intangible assets . . . . . . . 603 563 402 174 86Acquisition-related charges . . . . . . . . . . . . . . . . . . . 54 280 701 25 —Acquisition-related inventory write-downs . . . . . . . . — — 147 — —Total charges before taxes . . . . . . . . . . . . . . . . . . . . $ 808 $1,644 $3,823 $ 618 $ 188

Total charges, net of taxes . . . . . . . . . . . . . . . . . . . . $ 571 $1,127 $3,031 $ 493 $ 150

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(3) Net earnings (loss) from continuing operations before cumulative effect of change in accountingprinciple includes the following items:

2004 2003 2002 2001 2000

In millions

(Gains) losses on investments and earlyextinguishment of debt . . . . . . . . . . . . . . . . . . . . . $ (4) $ 29 $ 75 $ 419 $ (244)

Dispute settlement . . . . . . . . . . . . . . . . . . . . . . . . . . 70 — (14) 400 —Total losses (gains) before taxes . . . . . . . . . . . . . . . . . $ 66 $ 29 $ 61 $ 819 $ (244)

Total losses (gains), net of taxes . . . . . . . . . . . . . . . . . $ 56 $ 23 $ 64 $ 565 $ (154)

(4) All per-share amounts prior to fiscal 2001 reflect the retroactive effects of the two-for-one stocksplit in the form of a stock dividend effective October 27, 2000.

(5) Staff Accounting Bulletin No. 101, ‘‘Revenue Recognition in Financial Statements’’ (‘‘SAB 101’’),was adopted by HP in fiscal 2001. SAB 101 established that revenue is recognized when persuasiveevidence of an arrangement exists, delivery occurs or services are rendered, the sales price is fixedor determinable and collectibility is reasonably assured. The cumulative effect of this change inaccounting principle was $272 million, net of related taxes of $108 million.

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

The following discussion should be read in conjunction with the Consolidated Financial Statementsand the related notes that appear elsewhere in this document.

OVERVIEW

We are a leading global technology company and generate net revenue and earn our profits fromthe sale of products, technologies, solutions and services to consumers, businesses and governments.Our portfolio is broad and includes personal computers, handheld computing devices, home andbusiness imaging and printing devices, publishing systems, storage and servers, a wide array ofinformation technology (‘‘IT’’) services and software solutions. We have seven business segments: thePersonal Systems Group (‘‘PSG’’), the Imaging and Printing Group (‘‘IPG’’), Enterprise Storage &Servers (‘‘ESS’’), HP Services (‘‘HPS’’), HP Financial Services (‘‘HPFS’’), Software and CorporateInvestments. Given the cross-segment linkages in our Adaptive Enterprise Strategy, and in order tocapitalize on up-selling and cross-selling opportunities, ESS, HPS and Software are structured beneatha broader Technology Solutions Group (‘‘TSG’’). While TSG is not an operating segment, wesometimes provide financial data aggregating the segments within TSG in order to provide asupplementary view of our business.

Our business strategy revolves around the following strategic imperatives:

• to provide consumer customers with superior products, services and overall experiences byproviding leading-edge technologies that work seamlessly together;

• to deliver to business customers the best return on IT investments in the industry;

• to build world class cost structures and processes across our entire portfolio of businesses; and

• to focus our innovation and research and development in areas where we can make uniquecontributions while partnering with top providers in other areas to enable us to provide ourcustomers complete IT solutions.

This approach requires us to excel both in individual product categories and in managing acrossour broad portfolio in order to drive growth while optimizing cost structure. At the same time, ourproduct and geographic breadth help reduce volatility by balancing our financial results across a relatedbut diversified set of businesses.

Our financial results also are impacted by our ability to predict and to respond to industry-widetrends. For instance, underlying our strategy is our belief that physical, static processes will continue toshift to processes that are digital, mobile, virtual and personal. By anticipating these shifts andpreparing solutions that make these changes simple for customers, we have the opportunity toaccelerate these shifts and capture revenue and market share. Our approach to preparing thesesolutions can be seen in programs such as our digital photography initiative, where we offer compatiblesolutions spanning cameras, printers and paper, as well as in the focus on flexibility, modularity andintegration in our Adaptive Enterprise solutions.

Another trend significant to our business and financial results is the shift toward standardizedproducts, which presents revenue opportunities for certain of our businesses but presents an ongoingchallenge to our margins. To help address the potential margin impact of standardization, we takeongoing actions related to both revenue generation and cost structure management. In the sales and

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

marketing area, we are instituting programs designed to improve the rates at which we sell higher-margin configurations or options. We also continue to focus on managing procurement and laborexpenses. Key to our overall efforts in delivering superior products while maintaining a world-class coststructure is the increasingly global nature of technology expertise. This trend is allowing us to develop aglobal delivery structure to take advantage of regions where advanced technical expertise is available atlower costs. As part of this effort, we continually evaluate our workforce and make adjustments wedeem appropriate. When we make adjustments to our workforce, we may incur expenses associatedwith workforce reductions that delay the benefit of a more efficient workforce structure, but we believethat the fundamental shift to global delivery is crucial to maintaining a long-term competitive coststructure.

In terms of how our execution has translated into financial performance, the following providesour overview of key fiscal 2004 financial metrics:

TSGHPConsolidated ESS HPS Software Total PSG IPG HPFS

in millions, except per share amountsNet revenue . . . . . . . . . . . . . . . . $79,905 $15,152 $13,778 $ 922 $29,852 $24,622 $24,199 $1,895Year over year net revenue

% increase (decrease) . . . . . . . . 9% 4% 12% 19% 8% 16% 7% (1)%Earnings (loss) from operations . . . . $ 4,227 $ 173 $ 1,263 $ (145) $ 1,291 $ 210 $ 3,847 $ 125Earnings (loss) from operations as a

% of net revenue . . . . . . . . . . . 5.3% 1.1% 9.2% (15.7)% 4.3% 0.9% 15.9% 6.6%Net earnings . . . . . . . . . . . . . . . . $ 3,497Net earnings per share

Basic . . . . . . . . . . . . . . . . . . . $ 1.16Diluted . . . . . . . . . . . . . . . . . . $ 1.15

Cash and cash equivalents for the fiscal year ended October 31, 2004 totaled $12.7 billion, adecline of $1.5 billion from the October 31, 2003 balance of $14.2 billion. The decline was relatedprimarily to increased cash returned to stockholders through share repurchases and increased cashutilized for acquisitions in fiscal 2004, offset in part by increased earnings.

We intend the discussion of our financial condition and results of operations that follows toprovide information that will assist in understanding our consolidated financial statements, the changesin certain key items in those financial statements from year to year, and the primary factors thataccounted for those changes, as well as how certain accounting principles, policies and estimates affectour consolidated financial statements.

In order to provide additional information relating to our operating results, we also present asupplemental section of combined company information that discusses our operating results for thefiscal year ended October 31, 2002 as if HP and Compaq had been a combined company for all offiscal 2002.

The discussion of results of operations at the consolidated level is followed by a more detaileddiscussion of results of operations by segment and supplemental sections of combined companyinformation that discuss our segment operating results as if HP and Compaq had been a combinedcompany for all of fiscal 2002.

For a further discussion of factors that could impact operating results, see the section entitled‘‘Factors That Could Affect Future Results’’ below.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

General

The Consolidated Financial Statements of HP are prepared in accordance with U.S. generallyaccepted accounting principles, which require management to make estimates, judgments andassumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and thedisclosure of contingent assets and liabilities. Management bases its estimates on historical experienceand on various other assumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. Senior management has discussed the development,selection and disclosure of these estimates with the Audit Committee of HP’s Board of Directors.Management believes that the accounting estimates employed and the resulting balances arereasonable; however, actual results may differ from these estimates under different assumptions orconditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be madebased on assumptions about matters that are highly uncertain at the time the estimate is made; ifdifferent estimates reasonably could have been used; or if changes in the estimate that are reasonablylikely to occur periodically could materially impact the financial statements. Management believes thefollowing critical accounting policies reflect the significant estimates and assumptions used in thepreparation of the Consolidated Financial Statements.

Valuation of Goodwill and Indefinite-Lived Purchased Intangible Assets

We review goodwill and purchased intangible assets with indefinite lives for impairment annuallyand whenever events or changes in circumstances indicate the carrying value of an asset may not berecoverable in accordance with SFAS No. 142, ‘‘Goodwill and Other Intangible Assets.’’ The provisionsof SFAS No. 142 require that a two-step impairment test be performed on goodwill. In the first step,we compare the fair value of each reporting unit to its carrying value. Our reporting units areconsistent with the reportable segments identified in Note 18 of the Consolidated Financial Statementsin Item 8. We determine the fair value of our reporting units based on a weighting of income andmarket approaches. Under the income approach, we calculate the fair value of a reporting unit basedon the present value of estimated future cash flows. Under the market approach, we estimate the fairvalue based on market multiples of revenue or earnings for comparable companies. If the fair value ofthe reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is notimpaired and we are not required to perform further testing. If the carrying value of the net assetsassigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform thesecond step of the impairment test in order to determine the implied fair value of the reporting unit’sgoodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then werecord an impairment loss equal to the difference. SFAS No. 142 also requires that the fair value of thepurchased intangible assets with indefinite lives be estimated and compared to the carrying value. Weestimate the fair value of these intangible assets using an income approach. We recognize animpairment loss when the estimated fair value of the intangible asset is less than the carrying value.

Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset isjudgmental in nature and involves the use of significant estimates and assumptions. These estimatesand assumptions include revenue growth rates and operating margins used to calculate projected futurecash flows, risk-adjusted discount rates, future economic and market conditions, and determination of

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

appropriate market comparables. We base our fair value estimates on assumptions we believe to bereasonable but that are unpredictable and inherently uncertain. Actual future results may differ fromthose estimates. In addition, we make certain judgments and assumptions in allocating shared assetsand liabilities to determine the carrying values for each of our reporting units.

Our annual goodwill impairment analysis, which was performed during the fourth quarter of fiscal2004, did not result in an impairment charge. The excess of fair value over carrying value for each ofHP’s reporting units as of August 1, 2004, the annual testing date, ranged from approximately$700 million to approximately $34 billion. In order to evaluate the sensitivity of the fair valuecalculations on the goodwill impairment test, we applied a hypothetical 10% decrease to the fair valuesof each reporting unit. This hypothetical 10% decrease would result in excess fair value over carryingvalue ranging from approximately $200 million to approximately $30 billion for each of HP’s reportingunits.

Revenue Recognition

We enter into contracts to sell our products and services, and, while the majority of our salesagreements contain standard terms and conditions, there are agreements that contain multiple elementsor non-standard terms and conditions. As a result, significant contract interpretation is sometimesrequired to determine the appropriate accounting, including whether the deliverables specified in amultiple element arrangement should be treated as separate units of accounting for revenue recognitionpurposes, and, if so, how the price should be allocated among the elements and when to recognizerevenue for each element. We recognize revenue for delivered elements only when the fair values ofundelivered elements are known, uncertainties regarding customer acceptance are resolved and thereare no customer-negotiated refund or return rights affecting the revenue recognized for deliveredelements. Changes in the allocation of the sales price between elements might impact the timing ofrevenue recognition but would not change the total revenue recognized on the contract.

We recognize revenue as work progresses on certain fixed price contracts, such as consultingarrangements, using the proportional performance method. When applying the proportionalperformance method, we rely on estimates of total expected contract costs in order to determine theamount of revenue earned to date. We follow this method because reasonably dependable estimates ofthe revenue applicable to various stages of a contract can be made. Total contract profit is subject torevisions throughout the life of the contract. Changes in revenue as a result of revisions to costestimates are recorded to income in the period in which the facts that give rise to the revision becomeknown.

We record estimated reductions to revenue for customer and distributor programs and incentiveofferings, including price protection, promotions, other volume-based incentives and expected returns.Future market conditions and product transitions may require us to take actions to increase customerincentive offerings, possibly resulting in an incremental reduction of revenue at the time the incentive isoffered. Additionally, certain incentive programs require us to estimate, based on historical experience,the number of customers who will actually redeem the incentive.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

Allowance for Doubtful Accounts

Our allowance for doubtful accounts is determined using a combination of factors to ensure thatour trade and financing receivables balances are not overstated due to uncollectibility. We maintain anallowance for doubtful accounts for all customers based on a variety of factors, including the length oftime receivables are past due, trends in overall weighted average risk rating of the total portfolio,macroeconomic conditions, significant one-time events, historical experience and the use of third-partycredit risk models that generate quantitative measures of default probabilities based on market factorsand the financial condition of customers. Also, we record specific provisions for individual accountswhen we become aware of a customer’s inability to meet its financial obligations to us, such as in thecase of bankruptcy filings or deterioration in the customer’s operating results or financial position. Ifcircumstances related to customers change, our estimates of the recoverability of receivables would befurther adjusted, either upward or downward. The annual provision for doubtful accounts has rangedfrom 0.1% to 0.5% of net revenue over the last three fiscal years. Using our third-party credit riskmodel at October 31, 2004, a 50 basis point deterioration in either the weighted average defaultprobabilities of our significant customers or in the overall mix of our portfolio would have resulted inan approximately $20 million increase to our trade allowance at the end of fiscal year 2004.

Inventory

Our inventory is stated at the lower of cost or market. Adjustments to reduce the cost of inventoryto its net realizable value, if required, are made at the product group level for estimated excess,obsolescence or impaired balances. Factors influencing these adjustments include changes in demand,rapid technological changes, product life cycle and development plans, component cost trends, productpricing, physical deterioration and quality issues. Revisions to these adjustments would be required ifthese factors differ from our estimates.

Restructuring

We have engaged, and may continue to engage, in restructuring actions, which requiremanagement to utilize significant estimates related to realizable values of assets made redundant orobsolete and expenses for severance and other employee separation costs, lease cancellation and otherexit costs. Should the actual amounts differ from our estimates, the amount of the restructuring chargescould be materially impacted.

Warranty Provision

We provide for the estimated cost of product warranties at the time revenue is recognized. Weevaluate our warranty obligations on a product group basis. Our standard product warranty termsgenerally include post-sales support and repairs or replacement of a product at no additional charge fora specified period of time. While we engage in extensive product quality programs and processes,including actively monitoring and evaluating the quality of our component suppliers, our estimatedwarranty obligation is based upon warranty terms, ongoing product failure rates, repair costs, productcall rates, average cost per call and current period product shipments. If actual product failure rates,repair rates, service delivery costs or post-sales support costs differ from our estimates, revisions to theestimated warranty liability would be required. Warranty terms generally range from one to three yearsdepending upon the product. Over the last three fiscal years, the annual warranty provision hasaveraged approximately 4% of net product revenues, while actual annual warranty costs also haveaveraged approximately 4% of net product revenues.

33

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

Retirement Benefits

Our pension and other post-retirement benefit costs and obligations are dependent on variousactuarial assumptions used in calculating such amounts. These assumptions relate to discount rates,salary growth, long-term return on plan assets, medical cost trend rates and other factors. We base thediscount rate assumption on current investment yields on high quality fixed income investments. Thesalary growth assumptions reflect our long-term actual experience and future and near-term outlook.Long-term return on plan assets is determined based on historical portfolio results and management’sexpectation of the future economic environment, as well as target asset allocations. Our medical costtrend assumptions are developed based on historical cost data, the near-term outlook and anassessment of likely long-term trends. Actual results that differ from our assumptions are accumulatedand amortized over the estimated future working life of the plan participants.

Our major assumptions for determining net benefit cost for pension and post-retirement plansinclude the long-term return on plan assets, the discount rate for determining plan obligations and thefuture expected average increase in compensation levels. These rates vary by plan and the weightedaverage rates used are set forth in Note 15 to the Consolidated Financial Statements. Each assumptionhas different sensitivity characteristics, and, in general, changes, if any, have moved in the samedirection over the last several years. For fiscal 2004, a change in the weighted average rates would havehad the following impact on our net benefit cost:

• a decrease of 25 basis points in the long-term rate of return would have increased our netbenefit cost by approximately $20 million;

• a decrease of 25 basis points in the discount rate would have increased our net benefit cost byapproximately $50 million; and

• a decrease of 25 basis points in the future compensation rate would have decreased our netbenefit cost by approximately $40 million.

Taxes on Earnings

Our effective tax rate includes the impact of certain undistributed foreign earnings for which noU.S. taxes have been provided because such earnings are planned to be reinvested indefinitely outsidethe United States. As described in Note 12 to the Consolidated Financial Statements, our fiscal year2004 results do not reflect the impact of the American Jobs Creation Act of 2004 (the ‘‘Jobs Act’’). Wehave not completed the process of reevaluating our position with respect to the indefinite reinvestmentof foreign earnings to take into account the possible election of the repatriation provisions contained inthe Jobs Act. Foreign earnings remittance amounts are planned based on projected cash flow needs aswell as the working capital and long-term investment requirements of our foreign subsidiaries and ourdomestic operations. Based on these assumptions, we estimate the amount that will be distributed tothe United States and provide the U.S. federal taxes due on these amounts. Further, as a result ofcertain employment actions and capital investments undertaken by HP, income from manufacturingactivities in certain countries is subject to reduced tax rates, and in some cases is wholly exempt fromtaxes, for years through 2018. Material changes in our estimates of cash, working capital and long-terminvestment requirements in the various jurisdictions in which we do business could impact our effectivetax rate.

We record a valuation allowance to reduce our deferred tax assets to the amount that is morelikely than not to be realized. We have considered future market growth, forecasted earnings, futuretaxable income, the mix of earnings in the jurisdictions in which we operate, and prudent and feasible

34

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

tax planning strategies in determining the need for a valuation allowance. In the event we were todetermine that we would not be able to realize all or part of our net deferred tax assets in the future,an adjustment to the deferred tax assets would be charged to earnings in the period in which we makesuch determination. Likewise, if we later determine that it is more likely than not that the net deferredtax assets would be realized, we would reverse the applicable portion of the previously providedvaluation allowance. In order for us to realize our deferred tax assets we must be able to generatesufficient taxable income in the tax jurisdictions in which the deferred tax assets are located.

We calculate our current and deferred tax provision based on estimates and assumptions that coulddiffer from the actual results reflected in income tax returns filed during the subsequent year.Adjustments based on filed returns are recorded when identified, which is generally in the third quarterof the subsequent year for U.S. federal and state provisions.

The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign taxauthorities, which often result in proposed assessments. Our estimate for the potential outcome for anyuncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonablyforeseeable outcome related to these matters. However, our future results may include favorable orunfavorable adjustments to our estimated tax liabilities in the period the assessments are made orresolved or when statutes of limitation on potential assessments expire. Additionally, the jurisdictions inwhich our earnings or deductions are realized may differ from our current estimates. As a result, oureffective tax rate may fluctuate significantly on a quarterly basis.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS123R’’), which replaces SFAS No. 123, ‘‘Accounting for Stock-Based Compensation’’ (‘‘SFAS 123’’) andsupercedes APB Opinion No. 25, ‘‘Accounting for Stock Issued to Employees.’’ SFAS 123R requires allshare-based payments to employees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair values, beginning with the first interim or annual period afterJune 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted underSFAS 123, no longer will be an alternative to financial statement recognition. We are required to adoptSFAS 123R in our fourth quarter of fiscal 2005, beginning August 1, 2005. Under SFAS 123R, we mustdetermine the appropriate fair value model to be used for valuing share-based payments, theamortization method for compensation cost and the transition method to be used at date of adoption.The transition methods include prospective and retroactive adoption options. Under the retroactiveoptions, prior periods may be restated either as of the beginning of the year of adoption or for allperiods presented. The prospective method requires that compensation expense be recorded for allunvested stock options and restricted stock at the beginning of the first quarter of adoption ofSFAS 123R, while the retroactive methods would record compensation expense for all unvested stockoptions and restricted stock beginning with the first period restated. We are evaluating therequirements of SFAS 123R and we expect that the adoption of SFAS 123R will have a material impacton our consolidated results of operations and earnings per share. We have not yet determined themethod of adoption or the effect of adopting SFAS 123R, and we have not determined whether theadoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.

See Note 1 of the Consolidated Financial Statements in Item 8 for a description of other recentaccounting pronouncements, including the expected dates of adoption and estimated effects on resultsof operations and financial condition.

35

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

RESULTS OF OPERATIONS

Results of operations in dollars and as a percentage of net revenue were as follows:

For the fiscal years ended October 31

2004 2003(2) 2002(2)

In millions

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . $79,905 100.0% $73,061 100.0% $56,588 100.0%Cost of sales(1) . . . . . . . . . . . . . . . . . . . . . . . . 60,340 75.5% 53,858 73.7% 41,793 73.9%

Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . 19,565 24.5% 19,203 26.3% 14,795 26.1%Research and development . . . . . . . . . . . . . . . 3,506 4.4% 3,651 5.0% 3,368 6.0%Selling, general and administrative . . . . . . . . . 11,024 13.8% 11,012 15.0% 8,763 15.5%Amortization of purchased intangible assets . . 603 0.8% 563 0.8% 402 0.7%Restructuring charges . . . . . . . . . . . . . . . . . . . 114 0.1% 800 1.1% 1,780 3.1%Acquisition-related charges . . . . . . . . . . . . . . . 54 0.1% 280 0.4% 701 1.2%In-process research and development charges . 37 — 1 — 793 1.4%

Earnings (loss) from operations . . . . . . . . . . . 4,227 5.3% 2,896 4.0% (1,012) (1.8)%Interest and other, net . . . . . . . . . . . . . . . . . . 35 — 21 — 52 0.1%Gains (losses) on investments and early

extinguishment of debt . . . . . . . . . . . . . . . . 4 — (29) — (75) (0.1)%Dispute settlement . . . . . . . . . . . . . . . . . . . . . (70) (0.1)% — — 14 —

Earnings (loss) before taxes . . . . . . . . . . . . . . 4,196 5.2% 2,888 4.0% (1,021) (1.8)%Provision for (benefit from) taxes . . . . . . . . . . 699 0.8% 349 0.5% (118) (0.2)%

Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . $ 3,497 4.4% $ 2,539 3.5% $ (903) (1.6)%

(1) Cost of products, cost of services and financing interest.(2) Certain reclassifications have been made to prior year amounts in order to conform to the current

year presentation.

Net Revenue

The components of weighted average net revenue growth for the fiscal years ended October 31 areas follows:

2004 2003

Percentage points

Personal Systems Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 11.5Imaging and Printing Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 3.9HP Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9 5.8Enterprise Storage and Servers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.8 7.4Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2 0.1HP Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 0.4Corporate Investments & Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.4) —

Total HP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4 29.1

36

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

In fiscal 2004, net revenue increased 9% from the prior year period (3% on a constant currencybasis). The favorable currency impact was due primarily to the weakening of the dollar against theeuro. U.S. net revenue remained flat at $29.4 billion, while international net revenue increased 15% to$50.5 billion. PSG experienced net revenue growth across all businesses, with customer demandresulting in significant volume increases in desktop and notebook PCs. The overall volume increase wasoffset by a slight decline in the overall average selling prices (‘‘ASPs’’) due to a mix shift to lower-endproducts as well as component cost declines. IPG net revenue growth in fiscal year 2004 was driven bythe continued volume growth of printer supplies. LaserJet supplies and color laser printers experiencedstrong volume growth due to the growing demand for color-related products and digital photography.HPS achieved net revenue growth across all businesses in fiscal 2004. The impact of major outsourcingdeals and, to a lesser extent, the Triaton acquisition in the second half of the year, contributed to thegrowth in managed services and technology services (formerly called customer support). In fiscal 2004,ESS net revenue growth was generated by sales of industry standard servers, primarily our ProLiantserver line. Revenue declines from competitive pressures in storage and business critical serversmoderated the overall segment net revenue growth. The slight decrease in HPFS net revenue for fiscal2004 was due primarily to lower levels of revenue-generating assets.

In fiscal 2003, net revenue increased 29% from the prior year period (23% or a constant currencybasis) as a result primarily of our acquisition of Compaq at the beginning of May 2002. The favorablecurrency impact was due primarily to the weakening of the dollar against the euro. U.S. net revenueincreased 25% to $29.2 billion, while international net revenue grew 32% to $43.8 billion. The netrevenue increase in fiscal 2003 as compared to fiscal 2002 attributable to our acquisition of Compaqresulted in market share increases in PSG, ESS and HPS and, to a lesser extent, HPFS. IPG alsocontributed to the overall net revenue increase in fiscal 2003 due primarily to strong growth in ourprinter supplies reflecting higher volumes as a result of continued expansion of the printer hardwareinstalled base and, to a lesser extent, growth in printer hardware and digital imaging products as well assynergies resulting from the Compaq acquisition. Declining ASPs due to competitive pricing pressuresand a shift in sales mix to lower-priced products and service offerings moderated our overall netrevenue increases in fiscal 2003.

Gross Margin

The weighted average components of the change in gross margin as a percentage of net revenuefor the fiscal years ended October 31 are as follows:

2004 2003

Percentage points

Enterprise Storage and Servers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.8) 0.1HP Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.6) —Personal Systems Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.5) (0.3)Imaging and Printing Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (0.2)Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —HP Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 0.4Corporate Investments & Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 0.2

Total HP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.8) 0.2

37

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

Competitive pricing pressures contributed significantly to the gross margin decline in ESS, HPSand PSG for fiscal 2004 as compared to fiscal 2003. In ESS the competitive environment contributed tothe gross margin decline in the standards based server group along with the storage group. In additionto competitive pricing pressures, the gross margin decline in HPS reflected mix shifts to lower margincontracts for technology services and large outsourcing contracts for managed services, which typicallyhave lower margins in the early stages of their life cycles. Competitive pricing pressures, particularly inEurope, contributed to the gross margin decline in PSG. IPG gross margin remained flat for fiscal2004, with the favorable impact from cost reductions and increased shipments in supplies being offsetby a mix shift to lower margin products. HPFS gross margin increased for fiscal 2004 due to higherportfolio profitability primarily from end-of-lease transactions. In fiscal 2004, gross margin also wasfavorably impacted by the currency effects on net revenue resulting primarily from the weakening ofthe dollar against the euro.

The gross margin improvement for fiscal 2003 as compared to fiscal 2002 was due to costreductions resulting from workforce reductions and initial economies of scale and procurement leverageresulting from the Compaq acquisition. Declining ASPs due to competitive pricing pressures and a mixshift toward lower-margin products across most of our segments moderated the overall increase. Inaddition, fiscal 2003 gross margin was impacted favorably by currency effects on net revenue resultingprimarily from the weakening of the dollar against the euro, as well as higher cost of sales in fiscal2002 due to $147 million of inventory adjustments resulting from product roadmap decisions. ESSshowed a slight improvement compared to the prior year period as a result of growth in storage, whichoffset the unfavorable impact of a mix shift toward industry standard servers. HPS did not have asignificant impact on the change in gross margin. PSG had a negative impact on gross margin due to anunfavorable mix shift with increased sales in lower-margin products as a percentage of the overallbusiness.

Operating Expenses

Research and Development

In comparison to prior years, research and development expense as a percentage of net revenuedecreased in fiscal 2004 and 2003. For fiscal 2004, total research and development spending decreasedas a percentage of net revenue in each of our major segments. The decrease was a result of our focuson investing in categories of the business that yield stronger long-term returns in the marketplace andon curtailing spending in the more mature categories of our business, particularly within ESS. Inaddition, we continued to realize synergies from the Compaq acquisition during fiscal 2004, and wehave shifted our business towards more standards-based products, leveraging research and developmentfrom our technology partners. These decreases as a percentage of net revenue were moderated byincreased research and development spending in IPG related to strategic initiatives and unfavorablecurrency impacts resulting primarily from the weakening of the dollar against the euro. IPG’s increasein research and development spending was due primarily to our investment in inkjet technology. Forfiscal 2003, the decrease was due primarily to a full year of increased net revenue from our acquisitionof Compaq, combined with the favorable impact of prior year restructuring actions, as well as expensecontrol measures. In addition, the overall decrease in fiscal 2003 expense was moderated by higherpension and other post-retirement costs and unfavorable currency effects of the weakening of the dollaragainst the euro.

38

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

Selling, General and Administrative

The decline in selling, general and administrative expense as a percentage of net revenue in fiscal2004 as compared to fiscal 2003 was due primarily to the increase in net revenue outpacing expensegrowth. This was in part a result of effective expense controls and workforce reduction measures.Unfavorable currency impacts moderated the decline due to the weakening of the dollar against theeuro. In fiscal 2003, as compared to fiscal 2002, selling general and administrative expense as apercentage of net revenue declined slightly. The majority of the change was attributable to ouracquisition of Compaq in May 2002, including our workforce reduction efforts, expense controlmeasures as well as lower bad debt expense. In addition, fiscal 2003 expense was impacted partially byunfavorable currency effects primarily from the weakening of the dollar against the euro.

Amortization of Purchased Intangible Assets

The increase in amortization expense in fiscal 2004 as compared to fiscal 2003 was due primarilyto the amortization of intangible assets related to the acquisition of Triaton GmbH, Triaton France SASand Triaton N.A., Inc. (USA) (collectively ‘‘Triaton’’) in April 2004. The increase in amortizationexpense in fiscal 2003 as compared to fiscal 2002 was due primarily to amortization of purchasedintangible assets related to the acquisition of Compaq in May 2002, and to a lesser extent, theacquisition of Indigo N.V. (‘‘Indigo’’) in March 2002. This increase was offset in part by the eliminationof goodwill amortization, as well as the write-off of purchased intangible assets related to ourmiddleware and storage virtualization offerings in fiscal 2002 that related to the Compaq acquisitionproduct road map.

Restructuring Charges

HP implemented certain strategic restructuring programs during fiscal years 2003 and 2002. Netrestructuring charges for the 3-year period ended October 31, 2004 aggregated approximately$2.7 billion, the majority of which related to restructuring of pre-merger HP in connection with the2002 acquisition of Compaq. In fiscal 2003, HP implemented restructuring programs in order tomanage our cost structure and better align it with business conditions. The majority of restructuringcharges incurred during fiscal 2004 represent fiscal 2003 restructuring plan activities that did not meetthe recognition criteria for accrual during 2003 and, accordingly, were charged to expense as incurredin fiscal 2004, as well as changes in the original estimates for the fiscal 2002 and 2003 plans. Thesechanges in estimates were related primarily to asset impairments for buildings vacated as a result of theCompaq acquisition, adjustments to estimates of severance and other employee benefits costs as well asrevisions to contract termination costs.

In addition, HP recorded approximately $1.2 billion of restructuring liability as part of theacquisition of Compaq and allocated such liability as an element of the original purchase priceallocation in fiscal 2002. Approximately $960 million of this amount related to the restructuring of thepre-merger Compaq business at the time of the acquisition, and approximately $259 million related topre-existing Compaq restructuring liabilities. Downward revisions to the original estimates for thesepre-merger Compaq-related restructuring plans have been recorded as decreases to the Compaq-relatedgoodwill, while increases have been recorded as restructuring expense in the period in which theyoccur.

The effect of the restructuring programs put in place as a result of the acquisition of Compaq hasbeen to reduce costs by removing duplication, leverage the benefits of the larger organization, as well

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

as streamline and focus the operations of HP. Cost benefits earned from strategic product roadmapdecisions, headcount and facilities reductions and realignment, and more focused and efficient researchand development and sales and marketing programs, have been substantial, as seen in the progressivelowering of operating expenses as a percentage of net revenue. Of the total $3.5 billion of costsynergies associated with the Compaq integration completed at the end of fiscal 2003, approximately$2 billion are the result of these acquisition-related restructuring plans. These efforts not only haveimproved profitability but also have allowed HP to target and serve its customers better.

Restructuring liabilities of $288 million at October 31, 2004 are composed primarily of theremaining cash payments on certain severance benefits for non-U.S. operations and contracttermination costs, including canceled facility leases. These obligations will be largely settled by the endof fiscal 2010. In addition, approximately $6 million of costs related to the 2003 plans have not yetbeen accrued, as the requirements for recognition have not yet been met, and will be charged tooperations as the restructuring activities occur during fiscal 2005.

The following table summarizes the major activities in aggregate and during fiscal 2004, 2003 and2002 related to restructuring programs:

For the fiscal years ended October 31AggregateTotal 2004 2003 2002

In millions, except employee dataWorkforce reductions (number of employees):

2002 plans—estimate and estimate revisions . . . . . . . . . . . . . . 17,600 — (300) 17,9002002 plans—exits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,600) (100) (4,800) (12,700)

Remaining to exit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —

2003 plans—estimate and estimate revisions . . . . . . . . . . . . . . 8,600 (400) 9,0002003 plans—exits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,300) (1,300) (7,000)

Remaining to exit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300

Restructuring program charges:

2003 cost structure realignment charges:Severance and other benefits . . . . . . . . . . . . . . . . . . . . . . $ 645 $ 6 $ 639Asset impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 6 71Other infrastructure costs . . . . . . . . . . . . . . . . . . . . . . . . . 67 25 42

Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 789 37 752

2002 HP and Compaq restructuring charges:Severance and other benefits . . . . . . . . . . . . . . . . . . . . . . $ 1,099 $ 38 $ 32 $ 1,029Asset impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 611 — 65 546Other infrastructure costs . . . . . . . . . . . . . . . . . . . . . . . . . 172 37 (49) 184

Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,882 75 48 1,759

2001 restructuring plan charges . . . . . . . . . . . . . . . . . . . . . . 23 2 — 21

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,694 $ 114 $ 800 $ 1,780

Pre-merger Compaq restructuring plans and goodwill adjustments:Pre-existing 2001 Compaq plan . . . . . . . . . . . . . . . . . . . . $ 231 $ (2) $ (26) $ 2592002 Compaq plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 795 (71) (94) 960

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,026 $ (73) $ (120) $ 1,219

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

Workforce Rebalancing

We continue to focus on managing procurement expenses and developing a global deliverystructure to take advantage of regions where advanced technical expertise is available at lower costs. Aspart of this effort, we continually evaluate our workforce and make adjustments we deem appropriate.When we make adjustments to our workforce, we may incur expenses associated with workforcereductions that delay the financial benefit of a more efficient workforce structure, but we believe thatthe fundamental shift to global delivery is crucial to maintaining a long-term competitive cost structure.In this context, we expect to incur expenses of approximately $200 million in the first half of fiscal 2005in connection with workforce reductions. Full financial benefits from workforce reductions begin whenaggregate cost savings exceed the separation expenses, which is typically in the quarterly periodfollowing the quarter in which these expenses are incurred.

Acquisition-Related Charges

Acquisition-related charges in fiscal 2004, 2003 and 2002 consist substantially of costs related to theCompaq acquisition. Acquisition-related charges in fiscal 2004 consisted primarily of the amortizationof deferred compensation, merger-related inventory adjustments and professional fees, while the costsin fiscal 2003 and fiscal 2002 were attributable primarily to costs incurred for employee retentionbonuses, professional fees and consulting services. Acquisition-related charges in fiscal year 2002 alsoincluded costs incurred for proxy solicitation and advertising for the Compaq acquisition.

In-Process Research and Development Charges

In-process research & development (‘‘IPR&D’’) charges are recorded in connection withacquisitions accounted for as business combinations, as more fully described in Note 5 to theConsolidated Financial Statements. Research and development projects engaged in by an acquiredcompany are analyzed as of the acquisition date to determine their current technological feasibility andpossible future alternative uses. Based on an analysis of estimated costs to develop, discounted cashflows from the projects, revenue estimates related to market size, growth factors, technology trends andin the absence of alternative future use, HP determines the purchase price amount to be allocated toIPR&D and records the amount as expense at that time. In fiscal 2004, 2003 and 2002 we recordedIPR&D charges of $37 million, $1 million and $793 million, respectively, related to acquisitions duringthose years.

Interest and Other, Net

Interest and other, net increased $14 million in fiscal 2004 from fiscal 2003. The increase in fiscal2004 was the result of lower interest expense offset partially by higher currency losses from balancesheet remeasurement and related hedging strategies. Interest and other, net decreased $31 million infiscal 2003 from fiscal 2002. The decline in fiscal 2003 was attributable primarily to increased interestexpense associated with higher average borrowings and lower dividend and other income associatedwith our investment activities as compared to fiscal 2002, while lower net currency losses from ourbalance sheet remeasurement moderated the decline.

Gains (Losses) on Investments and Early Extinguishment of Debt

The net gain for fiscal 2004 was attributable mainly to the realization of a contingent gainassociated with a prior period divestiture and realized gains from the sale of investments in excess of

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

impairment charges. Net losses in fiscal 2003 and 2002 resulted mainly from impairment charges inexcess of gains realized on our investment portfolio. Losses decreased in fiscal 2003 from 2002 whilegains from the early extinguishment of debt under our repurchase program for zero couponsubordinated convertible notes offset slightly the fiscal 2002 impairment losses.

Our investment portfolio includes equity investments in publicly-traded and privately-held emergingtechnology companies. Many of these emerging technology companies are still in the start-up ordevelopment stage. Our investments in these companies are inherently risky because the technologiesor products they have under development are typically in the early stages and may never becomesuccessful. Depending on market conditions, we may incur additional charges on our investmentportfolio in the future.

Dispute Settlement

On May 14, 2004, HP announced that it had resolved a dispute regarding certain contracts withthe Government of Canada. HP Canada agreed to reimburse the Government of Canada the sum ofCDN$146 million (approximately US$105 million on such date). This settlement resulted in anadditional charge of $70 million in the second quarter of fiscal 2004, as more fully described in Note 17of the Consolidated Financial Statements in Item 8.

In July 2001, we signed a definitive agreement with Comdisco, Inc. (‘‘Comdisco’’) to acquiresubstantially all of Comdisco’s business continuity services business. The agreement was subject to thebankruptcy court sales process and related approvals. In November 2001, the bankruptcy courtannounced that we were not selected as the winning bid to acquire Comdisco’s business continuityservices business. In the third quarter of fiscal 2002, we received $14 million in a settlement related tothe termination of the definitive agreement.

Provision for (Benefit from) Taxes

Our effective tax rate on earnings from operations in fiscal 2004, 2003, and 2002 differs from theU.S. federal statutory rate of 35% due generally to tax rate benefits of certain earnings from operationsin lower-tax jurisdictions throughout the world for which no U.S. taxes have been provided becausesuch earnings are planned to be reinvested indefinitely outside the United States. For a fullreconciliation of our effective tax rate to the U.S. federal statutory rate, see Note 12 of theConsolidated Financial Statements in Item 8.

Our effective tax rate resulted in a 16.7% provision in fiscal 2004 on our pretax earnings, a 12.1%provision in fiscal 2003 on our pre-tax earnings and an 11.6% benefit in fiscal 2002 on our pre-tax loss.In fiscal 2004, the tax rate benefited from net favorable adjustments to previously estimated taxliabilities of $207 million, which decreased the provision for taxes by approximately $0.07 per share.Excluding these adjustments, our tax rate for fiscal 2004 would have been 21.6%. The most significantfavorable adjustments related to the resolution of a California state income tax audit, a net favorablerevision to estimated tax accruals upon filing the 2003 U.S. income tax return, and a reduction in taxeson foreign earnings due to a change in regulatory policy. These favorable adjustments were offset inpart by the net effect of smaller adjustments to income tax liabilities in various jurisdictions.

The increase in the overall tax rate in fiscal 2004 from fiscal 2003, and fiscal 2003 from fiscal 2002,is driven primarily by a decline in the benefit percentage from lower rates in other jurisdictions in bothperiods. Lower tax rates in non-U.S. jurisdictions provided a benefit of 15.3% in fiscal 2004, a declinefrom a benefit of 23.9% and 36.0% in fiscal 2003 and fiscal 2002, respectively. The major factor causing

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

the reduction in this rate benefit percentage in fiscal 2004 and fiscal 2003 from the respective precedingyears is the decline in restructuring and other deductible acquisition-related charges that were incurredfor the most part in higher-tax jurisdictions during those years. In fiscal 2002, operating losses also werea significant contributor to the tax benefit, offset in part by the impact of non-deductible items,primarily acquisition-related charges, goodwill amortization and IPR&D charges.

Combined Company Results

The following discussion includes the combined results of operations of HP and Compaq as if theacquisition had occurred as of the beginning of fiscal 2002. We have included this additionalinformation in order to provide further insight into our prior period operating results and trends. Thissupplemental information is presented in a manner consistent with the disclosure requirements ofStatement of Financial Accounting Standards (‘‘SFAS’’) No. 141, ‘‘Business Combinations.’’ Thecombined company results for fiscal 2003 are the same as the historical results, as Compaq wasincluded for the entire period. Due to different historical fiscal period ends for HP and Compaq, theresults for the fiscal year ended October 31, 2002 combine the results of HP for the fiscal year endedOctober 31, 2002 and the historical quarterly results of Compaq for the six-month period endedMarch 31, 2002 and for the period May 3, 2002 (the acquisition date) to October 31, 2002.

Results of operations for the combined company, in dollars and as a percentage of net revenue,were as follows:

For the fiscal years ended October 31

2003(2) 2002(2)

In millions

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $73,061 100.0% $72,346 100.0%Cost of sales(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,858 73.7% 54,311 75.1%

Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,203 26.3% 18,035 24.9%Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,651 5.0% 3,953 5.4%Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . 11,012 15.0% 11,091 15.3%Amortization of purchased intangible assets . . . . . . . . . . . . . . . . . 563 0.8% 664 0.9%Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800 1.1% 1,780 2.5%Acquisition-related charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280 0.4% 772 1.1%In-process research and development charges . . . . . . . . . . . . . . . 1 — 793 1.1%

Earnings (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . 2,896 4.0% (1,018) (1.4)%Interest and other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 — 20 —Losses on investments and early extinguishment of debt . . . . . . . . (29) — (70) (0.1)%Dispute settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 14 —

Earnings (loss) before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,888 4.0% (1,054) (1.5)%Provision for (benefit from) taxes . . . . . . . . . . . . . . . . . . . . . . . . 349 0.5% (126) (0.2)%

Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,539 3.5% $ (928) (1.3)%

(1) Cost of products, cost of services and financing interest.(2) Certain reclassifications have been made to prior fiscal year balances in order to conform to the

current fiscal year presentation.

43

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

Net Revenue

The weighted average components of the increase in net revenue for the fiscal year endedOctober 31 were as follows:

2003

Percentage points

Imaging and Printing Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0Enterprise Storage and Servers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.0)Personal Systems Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.9)HP Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.2)Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.1)HP Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —Corporate Investments & Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2

Total HP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0

On a combined company basis, net revenue increased 1% (but declined 4% on a constant currencybasis) in fiscal 2003. U.S. net revenue remained essentially flat at $29.2 billion, while international netrevenue increased 1% to $43.8 billion. Overall, the combined company net revenue in fiscal 2003 wasimpacted favorably by currency effects, particularly the weakening of the dollar against the euro. Loweraverage selling prices due to competitive pricing pressures, a shift in sales mix to lower-priced productsand service offerings and the consolidation of product offerings as a result of post-acquisition productroadmap decisions moderated the overall increase. The net revenue increase in IPG was driven bystrong growth in printer supplies resulting from a rise in volumes, reflecting continued expansion of theprinter hardware installed base, and to a lesser extent, growth from our business printer hardware anddigital imaging products. The ESS net revenue decline was attributable primarily to a net revenuedecrease in business critical servers due to competitive pricing as well as cautious enterprise capitalspending. The net revenue decline in PSG resulted primarily from lower average selling prices due tocompetitive pricing pressure and, to a lesser extent, a decline in volumes in commercial and consumerdesktop PCs. The HPFS net revenue decline was due primarily to a decrease in revenue-generatingassets. HPS net revenue decreased slightly due primarily to declines in the consulting and integrationbusiness, moderated by increases in managed services and technology services net revenue.

Gross Margin

The weighted average components of the increase in gross margin as a percentage of revenue forthe fiscal year ended October 31, 2003 were as follows:

2003

Percentage points

Personal Systems Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5Imaging and Printing Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3HP Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3Enterprise Storage and Servers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1Corporate Investments & Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2HP Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.1)

Total HP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

Gross margin as a percentage of combined company net revenue improved 1.4 percentage pointsin fiscal 2003 as compared to fiscal 2002. Overall, gross margin improvement in fiscal 2003 wasattributable primarily to cost savings resulting from improved cost structures, continued expense controlmeasures and, to a lesser extent, decreased component prices, moderated by declining average sellingprices due to competitive pricing pressures. The gross margin improvement in PSG was due primarilyto reduced direct and indirect procurement costs, reflecting synergies associated with our acquisition ofCompaq. The improvement in HPFS gross margin was due primarily to reduced bad debt expenseresulting from a stronger portfolio. IPG gross margin improvement was due primarily to the higher-margin supplies business becoming a greater percentage of IPG net revenue combined with favorablecurrency impact on net revenue resulting primarily from the weakening of the dollar against the euro.ESS’s gross margin improvement primarily reflected cost reductions in the storage and industrystandard server businesses as a result of the Compaq acquisition, offset in part by the product mix shiftaway from higher-margin business critical servers toward lower-margin industry standard servers. TheHPS gross margin decline was attributable primarily to competitive pricing pressures and reducedservice levels in the technology services business. In addition, the overall gross margin was impactedfavorably by a 0.2 percentage point improvement attributable primarily to inventory adjustments of$147 million in fiscal 2002 resulting from product roadmap decisions.

Operating Expenses

Research and Development

Research and development expense decreased 8% in fiscal 2003 as compared to fiscal 2002. Thedecrease was attributable primarily to our workforce reduction efforts and expense control measures. Infiscal 2003, research and development expense decreased in each of our business segments, except forIPG, in which research and development expense increased by 8%. IPG’s increase in research anddevelopment spending resulted primarily from our continued investment in emerging inkjet technology.In addition, the overall decrease in fiscal 2003 expense was moderated by higher pension and otherpost-retirement costs and unfavorable currency effects of the weakening of the dollar against the euro.

Selling, General and Administrative

Selling, general and administrative expense remained flat in fiscal 2003 as compared to fiscal 2002.In fiscal 2003, unfavorable currency effects driven mainly by the weakening of the dollar against theeuro, higher sales and marketing costs associated with the company-wide product branding campaignand higher pension and other post-retirement costs offset almost entirely the overall decreasesattributable to workforce reduction efforts, expense control measures and lower bad debt expense.

Amortization of Purchased Intangible Assets

Effective in fiscal 2003 (the date of adoption of SFAS No. 142, ‘‘Goodwill and Other IntangibleAssets’’), we no longer amortize goodwill and instead test goodwill at least annually for impairment. Ona combined company basis, amortization expense decreased by $101 million in fiscal 2003 as comparedto fiscal 2002. The decrease in fiscal 2003 expense was due primarily to the elimination of goodwillamortization and the write-off of the purchased intangible assets related to our middleware and storagevirtualization offerings in fiscal 2002 as a result of product roadmap decisions in connection with theCompaq acquisition.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

Restructuring Charges

On a combined company basis, we recorded restructuring charges of $800 million in fiscal 2003and $1.8 billion in fiscal 2002. A discussion of the fiscal 2003 and 2002 charges recorded by HP isincluded in the previous presentation.

Acquisition-Related Charges

In connection with the Compaq acquisition, the combined company incurred acquisition-relatedcharges of $280 million in fiscal 2003 and $772 million in fiscal 2002, which charges consisted primarilyof costs incurred for employee retention bonuses, consulting services and other professional fees. Inaddition, the acquisition-related charges in fiscal 2002 included costs incurred for proxy solicitation andadvertising.

In-Process Research and Development Charges

IPR&D charges are the same on a combined company basis as previously discussed.

Interest and Other, Net

On a combined company basis, interest and other, net remained essentially flat in fiscal 2003. Infiscal 2003, lower net losses on foreign currency transactions resulting from our balance sheetremeasurement and related hedging strategies as compared to fiscal 2002 were offset almost entirely bylower interest income and higher interest expense on debt.

Losses on Investments and Early Extinguishment of Debt

On a combined company basis, net losses were $29 million in fiscal 2003 and $70 million in fiscal2002 due generally to the reasons discussed previously.

Dispute Settlement

In fiscal 2002 we recorded settlement income of $14 million, as more fully discussed previously.

Provision for (Benefit from) Taxes

On a combined company basis, our effective tax rate resulted in a 12.1% provision in fiscal 2003on our pretax earnings and a 12.0% benefit in fiscal 2002 on our pretax loss. Our effective tax ratediffered from the U.S. federal statutory rate of 35% in fiscal 2003 and 2002 due generally to thereasons discussed previously.

Segment Information

A description of the products and services, as well as year-to-date financial data, for each segmentcan be found in Note 18 to the Consolidated Financial Statements in Item 8. We have restated segmentfinancial data for the fiscal years ended October 31, 2003 and 2002 to reflect changes in HP’sorganizational structure that occurred at the beginning of the first quarter of fiscal 2004. We describethese changes more fully in Note 18 to the Consolidated Financial Statements in Item 8. We havepresented the business segments in this Form 10-K based on our management organizational structureas of October 31, 2004, and the distinct nature of various businesses. Future changes to thisorganizational structure may result in changes to the reportable segments disclosed. The discussions

46

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

below include the results of each of our segments. Supplemental sections of combined companyinformation that discuss our segment operating results as if HP and Compaq had been combined for allof fiscal 2002 are presented in a manner consistent with the supplemental combined-companydisclosures included in the consolidated operating results discussion.

Technology Solutions Group

Given the cross-segment linkages in our Adaptive Enterprise offering, and in order to capitalize onup-selling and cross-selling opportunities, ESS, HPS and Software are structured beneath a broaderTechnology Solutions Group (‘‘TSG’’). While TSG is not an operating segment, we sometimes providefinancial data aggregating the segments within TSG in order to provide a supplementary view of ourbusiness. Each of the reportable segments of TSG is described in more detail below.

Enterprise Storage and ServersFor the fiscal years ended October 31

2004 2003 2002

In millions

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,152 $14,593 $10,402Earnings (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 173 $ 142 $ (308)Earnings (loss) from operations as a % of net revenue . . . . . . . . . . . 1.1% 1.0% (3.0)%

The components of weighted average net revenue growth, by business unit, for the fiscal yearsended October 31 were as follows:

2004 2003

Percentage points

Industry standard servers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9 29.4Business critical servers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.5) 4.0Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.6) 6.9

Total ESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 40.3

ESS net revenue increased 4% in fiscal year 2004 from fiscal 2003. Revenue on a constantcurrency basis decreased 2%. The favorable currency impact was due primarily to the weakening of thedollar against the euro. In fiscal 2004, ESS performance was hurt in the third fiscal quarter byexecution issues, namely a systems migration in the U.S., channel management issues in EMEA andweakness in Storage. ESS net revenue growth was, however, helped by industry standard servers’ unitgrowth of 22%, which translated to a 12% net revenue increase from fiscal 2003 in that category. Netrevenue in business critical servers declined by 2% in fiscal 2004 as compared to fiscal 2003, reflectingthe ongoing decline of the AlphaServer product line. RISC and Itanium-based servers experiencedrevenue growth. We introduced mid-range and high-end Itanium products widely in fiscal year 2004,and sales continued to increase during the year, with Itanium servers representing 16% of businesscritical servers in the fourth fiscal quarter. HP-UX server revenue increased 2% from fiscal 2003, offsetby declines in Alpha as we transition customers to non-Alpha products. NonStop server net revenuedeclined 1% from the prior year, reflecting a maturing installed base. Storage net revenue declined 7%,with declines in both the overall array and tape businesses. Net revenue declines from fiscal 2003 weredue primarily to our exposure to the declining tape market, aggressive pricing, inadequate storage salesspecialists coverage and some product updates that occurred late in fiscal 2004. Growth in storage

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

software and network attached storage offset partially the revenue decline in the primary productgroups.

ESS earnings from operations in fiscal 2004 improved by 0.1 percentage points, reflecting a3.9 percentage point decrease in operating expenses in relation to revenue resulting from effective costmanagement and increased volume in the industry standard server business. A decline in gross marginof 3.8 percentage points offset the decline in operating expenses and volume growth. The gross margindecline was the result of competitive pressures impacting both the industry standard servers group andthe storage business, along with a mix shift to lower margin products within the business critical serversgroup and more generally the continued mix shift towards industry standard servers within the segment.The business continues to focus on increasing direct sales, improving option attach rates and reducingwarranty costs in order to optimize future gross margins. Additionally, the execution issues of the thirdquarter that led to an operating loss in the quarter hampered full year performance.

The increase in ESS year-over-year operating results in fiscal 2003 was due substantially to theacquisition of Compaq. The significant increases from Compaq’s industry standard server business andCompaq’s storage and business critical server businesses were the main contributors to the overall netrevenue growth in fiscal 2003. Although overall unit sales increased due to the acquisition of Compaq,continued competitive pricing pressures impacted ASPs unfavorably in fiscal 2003. Discontinuance ofHP’s NetServer and certain storage products as part of the post-acquisition product roadmap decisionsmoderated volume growth. The improvement in the operating margin ratio was attributable primarily toworkforce reduction activities and effective cost management, offset in part by a decline in grossmargin. The gross margin deterioration reflected competitive pricing pressures and a mix shift towardindustry standard servers, which have significantly lower margins than other products in the segment.

Enterprise Storage and Servers—Supplemental Combined Company Information

We present a supplementary discussion of ESS combined company results below.

Supplemental CombinedCompany Information

For the fiscal years ended October 31

2003 2002

In millions

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,593 $15,337Earnings (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 142 $ (313)Earnings (loss) from operations as a % of net revenue . . . . . . . . . . 1.0% (2.0)%

ESS’s combined company net revenue declined 5% in fiscal 2003. The net revenue decrease infiscal 2003 was 10% on a constant currency basis. The favorable currency impact was due primarily tothe weakening of the dollar against the euro. Overall, segment net revenue in fiscal 2003 continued tobe impacted unfavorably by competitive pricing pressures, product roadmap transitions and cautiousenterprise IT spending across all business units and most geographic regions.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

The components of weighted average net revenue growth by business unit were as follows for thefiscal year ended October 31:

2003

Percentage points

Business critical servers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5.1)Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.5)Industry standard servers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —

Total ESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.9)

The combined company net revenue decline for many business critical server products in fiscal2003 reflected competitive pricing as well as constraints on enterprise capital spending for largepurchases. Low-end and mid-range UNIX net revenue declined during the period, offset in part bystrong growth in high-end UNIX servers due to continued strength in Superdome products. NonStopserver net revenue declined in fiscal 2003, reflecting weak spending in the telecommunications andfinancial services industries. Product roadmap transitions in tape libraries due to our exiting the OEMbusiness and decreased sales of legacy arrays, offset in part by a mix shift toward EVA products, drovethe storage net revenue decline in fiscal 2003. Unit sales of industry standard servers increased in fiscal2003 and more than offset the net revenue decline attributable to lower ASPs and a mix shift towardlow-end servers. Despite unit declines in our NetServer products due to the post-acquisition roadmapdecision to discontinue this line of servers, total industry standard server units grew approximately 9%in the period due to strong worldwide shipments of our ProLiant servers.

Combined company earnings from operations as a percentage of net revenue were 1.0% in fiscal2003. In fiscal 2003, the operating loss improvement of 3.0 percentage points was due to a1.7 percentage point decrease in operating expenses as a percentage of net revenue and a1.3 percentage point increase in gross margin. Cost savings achieved through workforce reductions andcontinued cost control measures, offset in part by an unfavorable currency impact, drove the decline inoperating expense as a percentage of net revenue in fiscal 2003. The gross margin improvement in theperiod reflected primarily cost reductions resulting from the Compaq acquisition in the storage andindustry standard server businesses, coupled with a product mix shift within business critical servers andstorage. An unfavorable mix shift from low- and mid-range business critical servers toward lower-margin industry standard servers moderated the gross margin improvements during the period.

HP ServicesFor the fiscal years ended October 31

2004 2003 2002

In millions

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,778 $12,357 $9,052Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,263 $ 1,362 $ 891Earnings from operations as a % of net revenue . . . . . . . . . . . . . . . . 9.2% 11.0% 9.8%

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

The components of weighted average net revenue growth by business unit were as follows for thefiscal years ended October 31:

2004 2003

Percentage points

Managed services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8 8.8Technology services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 23.9Consulting and integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 3.7Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 0.1

Total HPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5 36.5

HPS’ net revenue increased 12% in fiscal 2004 compared to fiscal 2003. On a constant currencybasis, net revenue increased 5% in fiscal 2004. The favorable currency impact was due primarily to theweakening of the dollar against the euro and the yen. In fiscal 2004, the growth in managed serviceswas due to increased net revenue from new large outsourcing deals and the expansion of services toexisting customers, as well as the Triaton acquisition. The growth in technology services net revenuewas driven primarily by favorable currency impacts and the Triaton acquisition, along with strength inintegrated support, desktop lifecycle and mission critical support solutions. An increase in coreconsulting and integration services contributed to a slight growth in the consulting and integrationbusiness in fiscal 2004, while a decrease in sales of complimentary third-party products impacted netrevenue for this business negatively.

HPS earnings from operations as a percentage of net revenue declined 1.8 percentage points infiscal 2004 in part due to the continued growth in managed services, a lower-margin business, becomingan increasingly larger part of HPS. Operating profit ratio declines in the managed services andtechnology services business contributed to the overall segment operating profit ratio decline in fiscal2004. Large outsourcing contracts at the early stages of their life cycle had lower margins in fiscal 2004,which drove the decline in the managed services operating profit ratio. In the technology servicesbusiness, competitive pricing pressures in both renewals and new contracts and a mix shift from highermargin support agreements (e.g., Unix) to lower margin contracts (e.g., networking installations andintegrated multi-vendor support offerings) affected the technology services operating profit ratio and toa lesser degree costs related to the integration of recent acquisitions. The overall operating profit ratiodecline was moderated somewhat by an operating profit ratio improvement in the consulting andintegration business as a result of a sales force focus on HP’s Adaptive Enterprise offerings, customerrelationship management and continued process improvements.

The increase in HPS year-over-year operating results in fiscal 2003 was due substantially to theacquisition of Compaq. Although the acquisition of Compaq resulted in an increase in services acrossall business units in fiscal 2003, our consulting and integration and technology services businesses wereimpacted unfavorably by the weak demand for IT infrastructure products, the slowdown of enterprisespending, and competitive pricing pressures. Our managed services business benefited from theslowdown in fiscal 2003 as customers reduced costs by outsourcing IT infrastructure. Earnings fromoperations as a percentage of net revenue increased in fiscal 2003 as compared to fiscal 2002 due toexpense control measures and workforce reduction initiatives. A shift in the net revenue mix away fromthe consulting and integration business, which typically has operating profit ratios lower than thesegment average, also increased the earnings from operations ratio.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

HP Services—Supplemental Combined Company Information

We present a supplementary discussion of HPS combined company results below.

Supplemental CombinedCompany Information

For the fiscal years ended October 31

2003 2002

In millions

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,357 $12,368Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,362 $ 1,370Earnings from operations as a % of net revenue . . . . . . . . . . . . . . 11.0% 11.1%

HPS’ combined company net revenue was essentially flat in fiscal 2003 as compared to fiscal 2002.On a constant currency basis, net revenue decreased approximately 6% in fiscal 2003. The favorablecurrency impact in fiscal 2003 was due primarily to the weakening of the dollar against the euro.

The components of weighted average net revenue growth, by business unit were as follows for thefiscal year ended October 31:

2003

Percentage points

Consulting and integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.4)Technology services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6Managed services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —

Total HPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.1)

A decline in core consulting and integration services drove the combined company net revenuedecrease in the consulting and integration business in fiscal 2003. The decline in core consulting andintegration net revenue reflected competitive pricing pressures and weak demand. An increase in newand existing large outsourcing deals, reflecting the ongoing mix shift toward larger comprehensive dealsas customers outsourced substantial portions of their IT infrastructure to HP, as well as favorablecurrency impacts mentioned above, contributed to the growth in managed services net revenue in fiscal2003. The growth in technology services net revenue in fiscal 2003 was due primarily to favorablecurrency impacts.

Combined company earnings from operations as a percentage of net revenue was 11.0% in fiscal2003 compared to 11.1% in fiscal 2002. Although the operating profit ratio remained flat in fiscal 2003,operating expenses decreased as a percentage of net revenue through expense control measures andworkforce reductions initiated in fiscal 2002, as well as reduced costs reflecting synergies associatedwith our acquisition of Compaq. A favorable business mix shift away from the consulting andintegration business, which typically has an operating profit ratio lower than the segment average,further helped the overall segment operating profit ratio in the period. An operating profit ratiodecline in the technology services business reduced fiscal 2003 operating margin. Competitive pricingpressures and reduced service levels had a negative impact on technology services operating margins.Higher pension and post-retirement costs resulting from fiscal 2003 changes in underlying assumptions,including a decrease in expected portfolio performance, a decrease in discount rates and an increase inmedical cost trend rates, as well as the extension of participation in pension and post-retirement benefit

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

plans to eligible pre-acquisition Compaq employees in the United States not covered by such plansprior to January 1, 2003 also contributed to the overall segment operating profit ratio decline in fiscal2003.

Software

For the fiscal years ended October 31

2004 2003 2002

In millions

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 922 $ 774 $ 703Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (145) $ (190) $ (348)Loss from operations as a % of net revenue . . . . . . . . . . . . . . . . . . . (15.7)% (24.5)% (49.5)%

In fiscal 2004, Software net revenue increased 19% (16% without acquisitions) from fiscal 2003and 13% on a constant currency basis. The majority of the currency impact resulted from theweakening of the dollar against the euro. Of the overall 19% net revenue increase, OpenView, ourmanagement solutions software product line, represented 13% (10% without acquisitions) percentagepoints of growth on a weighted average net revenue basis, while OpenCall, our telecommunicationssolutions product line, contributed the remaining 6 percentage points of the net revenue increase.OpenView net revenue growth was the result of market share gains in a growing market along with theimpact of recent acquisitions, which add breadth to our Adaptive Enterprise portfolio. The growth inOpenCall was due to increased spending in the telecommunications industry, associated with theadoption of the next generation of network infrastructure.

The operating margin improvement of 8.8 percentage points in fiscal 2004 from fiscal 2003 wasdriven primarily by a decrease of operating expense as a percentage of net revenue. The decrease inoperating expense was attributable to effective cost management as operating expenses, particularlymarketing and research and development costs, grew slower than net revenue despite the unfavorableimpact of currency and increased acquisition-related costs. There was some gross margin decline,resulting from an increasingly competitive pricing environment.

In fiscal year 2003, software net revenue increased by 10% when compared to fiscal 2002, dueprimarily to the acquisition of Compaq. Of the overall 10% revenue increase, on a weighted averagebasis OpenView represented 6 percentage points of the increase, while OpenCall contributed theremaining 4 percentage points of the revenue increase. The addition of Compaq products (primarily inOpenCall) more than offset the decline in sales of similar HP products, which resulted from continuedweakness in the telecommunications industry across all geographical regions. OpenView net revenuegrowth was the result of market share gains in a growing market.

In fiscal 2003, the improvement in the operating margin ratio of 25.0 percentage points from fiscal2002 was attributable primarily to workforce reductions and effective cost management, offset in partby the unfavorable impact of currency. The gross margin improvement reflected a product mix shifttowards higher margin OpenView products.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

Software—Supplemental Combined Company Information

We present a supplementary discussion of Software combined company results below.

Supplemental CombinedCompany Information

For the fiscal years ended October 31

2003 2002

In millions

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 774 $ 817Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (190) $ (349)Loss from operations as a % of net revenue . . . . . . . . . . . . . . . . . . (24.5)% (42.7)%

In fiscal 2003, Software combined company net revenue declined 5% compared to fiscal 2002. Ofthe overall net revenue decrease, OpenCall accounted for 10 percentage points of the decline on aweighted average net revenue basis, partially offset by an increase in OpenView net revenue of5 percentage points. The decline in OpenCall resulted from continued weakness in thetelecommunications industry, across all geographical regions. OpenView net revenue growth was theresult of market share gains in a growing market.

The fiscal 2003 software operating margin improvement of 18.2 percentage points compared tofiscal 2002 was due to a 9.5 percentage point decrease in operating expense as a percentage of netrevenue, along with an 8.7 percentage points increase in gross margin. Cost savings achieved throughworkforce reductions and continued cost control measures, offset in part by the unfavorable impact ofcurrency, drove the decline in operating expense as a percentage of net revenue in fiscal 2003. Thegross margin improvement reflected a product mix shift towards higher-margin OpenView products.

Personal Systems GroupFor the fiscal years ended October 31

2004 2003 2002

In millions

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,622 $21,210 $14,680Earnings (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 210 $ 22 $ (236)Earnings (loss) from operations as a % of net revenue . . . . . . . . . . . 0.9% 0.1% (1.6)%

The components of weighted average net revenue growth, by business unit were as follows for thefiscal years ended October 31:

2004 2003

Percentage points

Desktop PCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.9 21.9Notebook PCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 19.6Handhelds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7 2.0Workstations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 1.1Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (0.1)

Total PSG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.1 44.5

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

PSG’s net revenue increased 16% in fiscal 2004 from fiscal 2003. On a constant currency basis, theincrease was 10%. The favorable currency impact was due primarily to the weakening of the dollaragainst the euro. In fiscal 2004, the net revenue increase across all businesses was the result primarilyof an overall 17% volume increase. Volume increases were the result of strong market growth in bothconsumer and commercial segments, our re-entry into the China market, and the introduction of newproducts such as the media center PCs, widescreen notebook PCs, converged devices and a broaderproduct line offering in pen-based iPaqs. In fiscal 2004, consumer and commercial desktop PC volumesincreased 15% and 11%, respectively, while notebook PC volume increased 21%. The volume increasewas moderated by a slight decline in ASPs. The ASP decline was due to a mix shift toward lower-endpersonal workstations and iPaq handhelds, as well as component cost declines, and was offset partiallyby a strong monitor attach rate in business PCs. Year-over-year net revenue increases in consumer andcommercial desktop PCs were 15% and 12%, respectively, while notebook PC net revenue increased22%.

PSG’s earnings from operations as a percent of net revenue was 0.9% in fiscal 2004 compared to0.1% in fiscal 2003. The increase is the result of volume increases and a decline in operating expensesof 1.3 percentage points, offset by a decline in gross margin of 0.4 percentage points. The operatingexpense decline is due to headcount reductions, tightening of administrative costs, lower research anddevelopment spending, and scale efficiencies in selling and marketing costs. The gross margin decline isdue primarily to continued competitive pressures in Europe, expansion into developing markets and ashift towards lower-end products.

The increase in PSG’s year-over-year operating results in fiscal 2003 was due substantially to theacquisition of Compaq in fiscal 2002. Although the acquisition of Compaq resulted in an increase inunit sales, the continued competitive pricing environment impacted ASPs unfavorably in fiscal 2003.The execution of post-acquisition product roadmap decisions, which included the discontinuance of theHP Vectra and Jornada product lines, impacted commercial desktop PC and handheld volumesunfavorably in fiscal 2003. Earnings from operations as a percentage of net revenue increased duringfiscal 2003 due to a decrease in operating expenses, primarily from headcount reductions and tighteningof administrative costs, as well as lower research and development spending and an improvement ingross margin. The gross margin improvement was the result primarily of our reduced direct andindirect procurement costs reflecting synergies associated with our acquisition of Compaq, as well as ashift toward our lower-cost direct business.

Personal Systems Group—Supplemental Combined Company Information

We present a supplementary discussion of PSG’s combined company results below.

Supplemental CombinedCompany Information

For the fiscal years ended October 31

2003 2002

In millions

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,210 $21,869Earnings (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22 $ (367)Earnings (loss) from operations as a % of net revenue . . . . . . . . . . 0.1% (1.7)%

54

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

PSG’s combined company net revenue declined 3% in fiscal 2003. The net revenue decrease infiscal 2003 was 8% on a constant currency basis. The favorable currency impact was due primarily tothe weakening of the dollar against the euro.

The components of weighted average net revenue growth, by business unit were as follows for thefiscal year ended October 31:

2003

Percentage points

Desktop PCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5.8)Other PSG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.1)Workstations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.1)Handhelds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —Notebook PCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0

Total PSG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.0)

The combined company net revenue decline in fiscal 2003 resulted from a decline in averageselling prices across all businesses within PSG and, to a lesser extent, a decline in volumes incommercial and consumer desktop PCs. The decline in average selling prices during the period wasattributable to the realignment of product prices. The continued mix shift from desktops to notebooksimpacted unfavorably consumer and commercial desktop PC volumes. Additionally, the commercialdesktop PC volume decline in the period was due to the execution of post-acquisition product roadmapdecisions, which included the discontinuance of the HP Vectra product line. Notebook PC volumesincreased in fiscal 2003 compared to the prior year, due to increased product competitiveness, abroader product portfolio, and the previously mentioned mix shift from desktops to notebooks, offset inpart the desktop PC decreases. In addition to the increase in notebook PC volumes, handheld volumesincreased due to new product introductions.

The combined company earnings from operations as a percentage of net revenue was 0.1% infiscal 2003 compared to a loss of 1.7% in fiscal 2002. In fiscal 2003, an improvement in gross margin asa percentage of net revenue represented 1.1 percentage points of the 1.8 percentage point increase,while the remaining 0.7 percentage point increase was due to a decrease in operating expenses as apercentage of revenue. The gross margin improvement resulted from our reduced direct and indirectprocurement costs, reflecting synergies associated with our acquisition of Compaq, moderated by thedeclining ASPs described above. The operating expense improvement resulted from headcountreductions, tightening of administrative costs and lower research and development expense.

Imaging and Printing Group

For the fiscal years ended October 31

2004 2003 2002

In millions

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,199 $22,569 $20,358Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,847 $ 3,596 $ 3,365Earnings from operations as a % of net revenue . . . . . . . . . . . . . . . . 15.9% 15.9% 16.5%

55

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

IPG’s net revenue grew 7% in fiscal 2004 and 11% in fiscal 2003. On a constant currency basis,the net revenue increase was 2% in fiscal 2004 and 5% in fiscal 2003. The favorable currency impactwas due primarily to the weakening of the dollar against the euro.

The components of weighted average net revenue growth, by business unit were as follows for thefiscal years ended October 31:

2004 2003

Percentage points

Printer supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 7.6Business printer hardware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 1.6Digital imaging products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 0.7Home printer hardware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.1) 0.5Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 0.5

Total IPG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 10.9

The growth in printer supplies net revenue in fiscal 2004 reflected higher volumes as a result ofthe continued expansion of the printer hardware installed base, due primarily to the strongperformance of color-related products and digital photography initiatives. In fiscal 2004, the growth inbusiness printer hardware net revenue was attributable to unit volume growth in color laser printers,business inkjet printers, monochrome laser printers and the increasing demand for multi-functionprinters. A continued shift in demand to lower-priced products and a competitive pricing environmentmoderated the net revenue increase in business printer hardware during the period. Net revenueremained unchanged in digital imaging products as a result of growth in camera unit shipments, offsetby a decrease in sales of scanners due to a declining market. The decline in home printer hardware wasdriven by decreases in ASPs due to the continued shift in demand to lower-priced products, particularlyin the sub-$200 all-in-one market, as well as a decline in sales of single-function devices.

In fiscal 2004, earnings from operations as a percentage of net revenue were 15.9%, consistentwith fiscal 2003. As a percentage of net revenue, both operating expense and gross margin remainedflat in fiscal 2004 as compared to fiscal 2003. Gross margin improvement in supplies was due in part tocost reductions and volume increases moderated by a mix shift to lower margin products. Gross marginimprovement also was the result of favorable mix shifts in home printer hardware. Gross margindeclines in digital imaging and business printer hardware, due in part to a shift to lower marginproducts in an increasingly competitive pricing environment, moderated the improvement. Within totaloperating expense, there was a slight increase in administrative expense, offset by a slight decline inselling costs, while both research and development costs and marketing costs, as a percentage of netrevenue, remained flat for fiscal 2004.

In fiscal 2003, growth in printer supplies net revenue reflected higher volumes as a result ofcontinued expansion of the printer hardware installed base. Sales of color and low-end monochromeprinters as well as multi-function printers and digital press products drove the net revenue increase inbusiness printer hardware during the period. A continued shift in demand to lower-priced products anda competitive pricing environment moderated the net revenue increase in business printer hardwareduring the period. Net revenue growth in digital imaging products in fiscal 2003 was attributable tosales of newly introduced cameras and Photosmart printers that were part of the segment’s consumerlaunch in the last half of fiscal 2002 and new models of cameras and Photosmart printers introduced inthe consumer launch in fiscal 2003, offset in part by a decrease in sales of scanners due to the declining

56

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

scanner market. The net revenue increase in home printer hardware in fiscal 2003 was attributable to asignificant volume increase in all-in-one devices, as well as a shift from single-function printers to multi-function devices. Decreases in ASPs due to the continued shift in demand to lower-priced products,particularly in the sub-$200 all-in-one market, as well as decreases in sales of single-function devices,moderated home printer net hardware revenue growth during the period.

In fiscal 2003, IPG’s earnings from operations as a percentage of net revenue were 15.9%compared to 16.5% in fiscal 2002. In fiscal 2003, the 0.6 net percentage point decrease in earnings fromoperations ratio consisted of a 0.8 percentage point increase in operating expense as a percentage ofrevenue, offset by an improvement in gross margin of 0.2 percentage points. The increase in operatingexpense as a percentage of net revenue was driven mainly by increased marketing costs associated witha company-wide product branding campaign and selling costs associated with an increased focus oncommercial sales in the segment, as well as unfavorable currency impacts. Gross margin improved dueprimarily to a mix of less low margin hardware, an increase in the supplies business, which typically hasgross margins that exceed the segment average, becoming a greater percentage of total segment netrevenue, as well as a favorable currency impact on net revenue resulting from the strengthening of theeuro as noted above offset partially the operating expense ratio increase. Gross margin decline inbusiness printer hardware and digital imaging products reflecting a shift to lower priced printing andimaging products and continued competitive pricing offset partially the gross margin improvement.

Imaging and Printing Group—Supplemental Combined Company Information

As Compaq did not have a comparable imaging and printing business, IPG’s historical results arenot materially different from the combined company results below.

Supplemental CombinedCompany Information

For the fiscal years ended October 31

2003 2002

In millions

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,569 $20,399Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,596 $ 3,366Earnings from operations as a % of net revenue . . . . . . . . . . . . . . 15.9% 16.5%

HP Financial Services

For the fiscal years ended October 31

2004 2003 2002

In millions

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,895 $1,921 $1,707Earnings (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 125 $ 79 $ (134)Earnings (loss) from operations as a % of net revenue . . . . . . . . . . . . 6.6% 4.1% (7.9)%

HPFS net revenue decreased 1% in fiscal 2004 compared to fiscal 2003. The decrease resultedprimarily from lower average levels of revenue-generating assets and lower used equipment sales. Thedecrease in average assets was due to portfolio amortization and asset sales exceeding new leaseoriginations throughout most of the year. Lower interest rates also contributed to the net revenuedecrease.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

In fiscal 2004, the 2.5 net percentage point increase in the earnings from operations ratio consistedof a 1.3 percentage point increase in gross margin and a 1.2 percentage point decrease in operatingexpense as a percentage of net revenue. The gross margin improvement was driven by higher portfolioprofitability resulting primarily from end of lease transactions and, to a lesser extent, lower interestcosts as a percentage of net revenue. The gross margin increase was offset in part by higher reservesrelated to certain aged receivables, particularly in Europe, the Middle East and Africa (‘‘EMEA’’) inthe fourth quarter of fiscal 2004. Cost savings achieved through continued cost controls, offset in partby an unfavorable currency impact, caused the decline in operating expenses as a percentage of netrevenue.

The acquisition of Compaq caused a substantial portion of the fluctuation in HPFS operatingresults in fiscal 2003 as compared to fiscal 2002. The acquisition resulted in higher revenue-generatingassets; however, a slowdown in lease originations moderated the net revenue increase. In fiscal 2003,earnings from operations as a percentage of net revenue improved from fiscal 2002 due to a significantreduction in bad debt expense, coupled with a decline in interest costs as a percentage of net revenue.

Financing Originations

For the fiscal years ended October 31

2004 2003 2002

In millions

Total financing originations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,852 $3,784 $3,490

New financing originations increased 2% in fiscal 2004 compared to fiscal 2003. The increaseresulted from higher levels of financing in Asia Pacific and a favorable currency impact, offset in partby a lower penetration rate of HP sales. Originations increased 8% in fiscal 2003 from fiscal 2002 dueto the acquisition of Compaq. The impacts of strengthened credit controls, weakness in the globaleconomy and lower average selling prices of HP products offset in part the increase in originations.

Portfolio Assets and Ratios

HPFS is a financial services organization and, as such, maintains a strategy to generate acompetitive return on equity by effectively leveraging its portfolio against the risks associated withinterest rates and credit. The HPFS business model is asset-intensive, and uses certain internal metricsto measure its performance against other financial services companies, including a segment balancesheet that is derived from HP’s internal management reporting system. The accounting policies used toderive these amounts are substantially the same as those used by the consolidated company. However,certain intercompany loans and accounts that are reflected in the segment balances are eliminated inHP’s Consolidated Financial Statements. A reconciliation of segment assets to consolidated total assets

58

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

is included in Note 18 of the Consolidated Financial Statements in Item 8. The portfolio assets andratios derived from the segment balance sheet for HPFS were as follows at October 31:

2004(1) 2003

In millions

Portfolio assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,380 $7,171

Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 210Operating lease equipment reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 30

Total reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264 240

Net portfolio assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,116 $6,931

Reserve coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6% 3.3%Debt to equity ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1x 4.5x

(1) Portfolio assets include financing receivables of $5.3 billion and net equipment under operatingleases of $1.4 billion as disclosed in Note 9 of the Consolidated Financial Statements in Item 8, aswell as approximately $400 million of capitalized profit on intercompany equipment transactionsand approximately $300 million of intercompany leases, both of which are eliminated inconsolidation.

Portfolio assets at October 31, 2004 increased 3% from the end of fiscal 2003. The increaseresulted from higher financing originations and a favorable currency impact. The percentage ofportfolio assets reserved increased in fiscal 2004 primarily due to higher reserves related to certain agedreceivables in EMEA, offset in part by the write-off of assets covered by specific reserves.

HPFS funds its operations mainly through a combination of intercompany debt and workingcapital. The portfolio assets and ratios are derived from the segment balance sheet. The increase in thedebt to equity ratio reflects a planned increase in portfolio leverage.

HP Financial Services—Supplemental Combined Company Information

We present a supplementary discussion of HPFS combined company results below:

Supplemental CombinedCompany Information

For the fiscal years ended October 31

2003 2002

In millions

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,921 $2,088Earnings (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 79 $ (128)Earnings (loss) from operations as a % of net revenue . . . . . . . . . . 4.1% (6.1)%

HPFS combined company net revenue declined 8% in fiscal 2003. Lower lease originations duringfiscal 2003 contributed to the decrease in net revenue. Strengthened credit controls and the ongoingweakness in the global economy resulted in the decrease in lease originations and the related decreasein revenue-generating assets. Decreases in ASPs of HP products also were a factor in the decrease inlease originations in fiscal 2003. Increased revenue from used equipment sales and other mid-term andend-of-term portfolio activities moderated the net revenue decrease.

59

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

Combined company earnings from operations as a percentage of net revenue were 4.1% in fiscal2003 compared to a loss of 6.1% in fiscal 2002. In fiscal 2003, a reduction in bad debt expense forcustomer write-offs resulting from strengthened global credit standards and a stronger portfolio resultedin the majority of the operating profit ratio improvement. Lower interest costs as a percentage of netrevenue also had a positive impact on the ratio.

Corporate InvestmentsFor the fiscal years ended October 31

2004 2003 2002

In millions

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 449 $ 344 $ 288Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (178) $ (161) $ (232)Loss from operations as a % of net revenue . . . . . . . . . . . . . . . . . . . (39.6)% (46.8)% (80.6)%

In fiscal 2004, the majority of the net revenue in this segment related to network infrastructureproducts, which grew 27% from fiscal 2003 and was the result of continued enhancements in the overallproduct portfolio, particularly in gigabit Ethernet switch products. In fiscal year 2003, the year-over-year net revenue growth in network infrastructure products was 18% due to increased volumes from anew product platform.

In fiscal 2004, expenses related to corporate development, global alliances and HP Labs increased10% from the prior fiscal year. The increase was the result in part of increased investment in strategicinitiatives. In fiscal 2003, expenses related to corporate development, global alliances and HP Labsdecreased 13% from fiscal 2002 due to the winding down of several incubation programs. Theseexpenses contributed to the majority of the loss in this segment’s results. These expenses were offset inpart by operating profit from network infrastructure product sales for all of the periods presented.Operating profit for the network infrastructure product group declined slightly in fiscal 2004 due mostlyto increased operating expense levels, primarily related to headcount growth in research anddevelopment, sales and marketing. Operating profit from network infrastructure product sales increasedin fiscal 2003 due in part to the successful launch of a new platform of modular Ethernet switches,which reduced the overall operating loss for Corporate Investments for that year.

LIQUIDITY AND CAPITAL RESOURCES

American Jobs Creation Act of 2004

Our cash balances are held in numerous locations throughout the world, including substantialamounts held outside the United States. Most of the amounts held outside the United States could berepatriated to the United States, but, under current law, would be subject to United States federalincome taxes, less applicable foreign tax credits. Repatriation of some foreign balances is restricted bylocal laws. HP has provided for the United States federal tax liability on these amounts for financialstatement purposes, except for foreign earnings that are considered indefinitely reinvested outside theUnited States.

The American Jobs Creation Act of 2004, enacted on October 22, 2004 (the ‘‘Jobs Act’’), providesfor a temporary 85% dividends received deduction on certain foreign earnings repatriated during aone-year period. The deduction would result in an approximate 5.25% federal tax rate on therepatriated earnings. To qualify for the deduction, the earnings must be reinvested in the United Statespursuant to a domestic reinvestment plan established by a company’s chief executive officer and

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Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

approved by its board of directors. Certain other criteria in the Jobs Act must be satisfied as well. Themaximum amount of HP’s foreign earnings that qualify for the temporary deduction is $14.5 billion.For HP, the one-year period during which the qualifying distributions can be made is fiscal 2005.

HP is in the process of evaluating whether it will repatriate any foreign earnings under therepatriation provisions of the Jobs Act and, if so, the amount that it will repatriate. The range ofreasonably possible amounts that HP is considering for repatriation, which would be eligible for thetemporary deduction, is zero to $14.5 billion. HP is awaiting the issuance of further regulatory guidanceand passage of statutory technical corrections with respect to certain provisions in the Jobs Act prior todetermining the amounts it will repatriate. If such regulatory guidance or technical corrections arefavorable, HP is likely to repatriate amounts in the high end of our range. HP expects to determine theamounts and sources of foreign earnings to be repatriated, if any, during the third quarter of fiscal2005. Use of the funds will be governed by a domestic reinvestment plan, as required by the Jobs Act.

Repatriation of the maximum amount eligible for the temporary deduction, which is $14.5 billion,could result in additional United States federal income tax expense, which HP currently estimates to bebetween $850 million and $925 million, in fiscal 2005. Repatriation also would substantially increaseliquidity in the United States, although use of the additional liquidity would be restricted by thedomestic reinvestment plan. There would be a corresponding reduction in liquidity at HP’s foreignsubsidiaries. Some foreign subsidiaries would be required to borrow in order to repatriate theirearnings to the U.S. We expect HP’s significant positive foreign cash flows would be sufficient to repayany foreign debt and replenish foreign cash balances over time. Should HP decide not to repatriateforeign earnings under the Jobs Act, we would meet United States liquidity needs through ongoing cashflows, external borrowing, or both. We utilize a variety of tax planning and financing strategies in aneffort to ensure that our worldwide cash is available in the locations in which it is needed.

FINANCIAL CONDITION

Our total cash and cash equivalents declined approximately 11%, to $12.7 billion at October 31,2004 from $14.2 billion at the end of fiscal 2003. Year-over-year net borrowings also declined 5.8%, or$440 million, to $7.1 billion at October 31, 2004. Improved net earnings in fiscal 2004 helped generate$5.1 billion in cash from operating activities. The cash generated by operations in fiscal 2004 fundednearly 77% of the $6.6 billion in fiscal 2004 investing and financing activities, with the remaining 23%coming from cash reserves due to our strong cash position. The $6.6 billion used for investing andfinancing activities includes $4.4 billion for share repurchases and acquisitions during fiscal 2004,compared to $900 million of share repurchases and acquisitions in fiscal 2003. Our cash positionremains strong and, as previously discussed, our liquidity in the United States may improve in fiscal2005 due to HP’s alternatives under the repatriation provisions of the Jobs Act.

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Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

For the fiscal years ended October 31

2004 2003 2002

In millions

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . $ 5,088 $ 6,057 $ 5,444Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . (2,454) (1,512) 3,118Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . (4,159) (1,549) (1,567)

Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . $(1,525) $ 2,996 $ 6,995

Key Performance Metrics

October 31

2004 2003 2002

Days of sales outstanding in accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 40 42Days of supply in inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 37 40Days of purchases outstanding in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . (52) (56) (47)

Cash conversion cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 21 35

Days of sales outstanding in accounts receivable (‘‘DSO’’) measures the average number of daysour receivables are outstanding. DSO is calculated by dividing accounts receivable, net of allowance fordoubtful accounts, by a 90-day average net revenue.

Days of supply in inventory (‘‘DOS’’) measures the average number of days from procurement tosale of our product. DOS is calculated by dividing inventory by a 90-day average cost of goods sold.

Days of purchases outstanding in accounts payable (‘‘DPO’’) measures the average number of daysour accounts payable balances are outstanding. DPO is calculated by dividing accounts payable by a90-day average cost of goods sold.

Our working capital requirements depend upon our effective management of the cash conversioncycle, which represents effectively the number of days from the purchase of raw materials, to thecollection of cash from our customers. The cash conversion cycle is the sum of DSO and DOS lessDPO.

2004 Compared to 2003

Operating Activities

Net cash provided by operating activities declined by 16% during fiscal 2004. Although our cashposition benefited from higher earnings, lower payments for restructuring actions and decreasedpension and other post-retirement contributions, these improvements were not sufficient to offset theincrease in the cash conversion cycle, which rose to 30 days in fiscal 2004 compared to 21 days in fiscal2003.

The lengthening of the cash conversion cycle was due largely to a $2.3 billion increase in accountsreceivable and inventory at October 31, 2004 as compared to the prior year and the timing of accountspayable payments. Accounts receivable was impacted unfavorably by currency fluctuations as the U.S.dollar weakened against the euro and a change in the mix of the accounts receivable portfolio. TheOctober 31, 2004 portfolio included a larger portion of U.S. retail and European direct receivables,

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Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

which generally have longer payment terms compared to the shorter payment terms of commercialreceivables. Higher inventory levels at October 31, 2004 reflect planned increases in certain inventoriesin preparation for the 2004 holiday season as well as a change in the timing of new product rollouts,particularly within IPG and PSG. HP introduced these products on a staggered basis during the latterhalf of fiscal 2004, with certain IPG products rolled out in the first month of fiscal 2005, as comparedto the more focused marketing rollout in the third quarter of fiscal 2003. In addition, ESS inventorylevels increased due primarily to backlog associated with industry standard servers, which occurred as aresult of component availability at quarter end.

Investing Activities

Net cash used in investing activities rose by 62% primarily due to $1.1 billion spent for severalbusiness acquisitions, including Triaton GmbH, Synstar plc and Digital GlobalSoft Limited, during fiscal2004 as compared to the $149 million spent on acquisitions in fiscal 2003. Capital expendituresincreased only slightly, by 7%, during fiscal 2004, with the increase mostly offset by asset dispositionactivities.

Financing Activities

The significant increase in net cash used in financing activities during fiscal 2004 resulted from ahigher level of share repurchases compared to fiscal 2003. The increase in share repurchases during2004 reflects our confidence in our long-term growth and profitability. We repurchase shares of ourcommon stock under a systematic program to manage the dilution created by shares issued underemployee stock plans and for other purposes. This program authorizes repurchases in the open marketor in private transactions. During fiscal year 2004 HP’s Board of Directors authorized $5.0 billion forfuture repurchases of outstanding shares, including $3.0 billion authorized in the fourth quarter of fiscal2004. We completed share repurchases of approximately 172 million shares for $3.3 billion in fiscal2004, including approximately 72 million shares under an accelerated share repurchase program, ascompared to repurchases of 40 million shares for $751 million in fiscal 2003. In November 2004, thefirst quarter of fiscal 2005, we closed the accelerated share repurchase program for a final averagepurchase price of $18.82 per share. At the price levels at which we have been repurchasing shares, webelieve the HP shares represent an attractive investment. We intend to continue to repurchase sharesopportunistically as a means of returning cash to stockholders as well as offsetting dilution from theissuance of shares under employee benefit plans. As of October 31, 2004, we had remainingauthorization of approximately $2.9 billion for future share repurchases.

Proceeds from the issuance of stock options and shares sold to employees under the stockpurchase plan were $570 million, or 18% higher in fiscal 2004 compared to fiscal 2003, mainly becauseof higher overall market prices during fiscal 2004. Also during fiscal 2004, borrowing activity ascompared to the prior fiscal year was significantly reduced. Net debt repayments in fiscal 2004 totaled$448 million and reflected lower net levels of commercial paper borrowings and current maturitiespayable. Fiscal 2003 borrowings activity included the issuance of debt as well as repayments, which on anet repayment basis totaled $303 million.

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Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

2003 Compared to 2002

Operating Activities

The increase in net cash provided by operations in fiscal 2003 as compared to fiscal 2002 resultedprimarily from higher earnings compared to a loss in fiscal 2002, as well as an increase in accountspayable. Improved management of the payables function and a contract manufacturing transition forsome of our laptop products to China contributed to the increase in accounts payable at the end offiscal 2003. Increases in inventory, continued severance payments through our restructuring programs,pension contributions and increases in receivables from contract manufacturers offset partially theincreases in cash flow provided from operations.

Investing Activities

The change in net cash flows from investing activities from fiscal 2003 as compared to fiscal 2002was due primarily to the $3.6 billion of cash acquired in the Compaq acquisition in fiscal 2002, as wellas $879 million recorded upon the dissolution of our equity method investment in LiquidityManagement Corporation (‘‘LMC’’), when it became a wholly-owned subsidiary on November 1, 2001.In addition, net capital expenditures were $1.6 billion in fiscal 2003 as compared to $1.3 billion in fiscal2002. Capital expenditure increases in fiscal 2003 related mainly to assets under lease by HPFS to thirdparties and to continued investment in IPG manufacturing equipment. In fiscal 2002, capitalexpenditures related primarily to financing assets and manufacturing investments across our businesses.HPFS capital expenditures in fiscal 2003 and fiscal 2002 increased primarily as a result of theacquisition of Compaq in the third quarter of fiscal 2002.

Financing Activities

The slight decrease in net cash used in financing activities in fiscal 2003 as compared to fiscal 2002was due primarily to a decrease in net repayments of total debt to approximately $303 million in fiscal2003 compared to net repayments of $472 million in fiscal 2002 and, to a lesser extent, from anincrease in cash generated by issuances of common stock under various employee stock plans. Theseincreases were offset in part by an increase in repurchases of approximately 40 million shares for$751 million in fiscal 2003 and 40 million shares for $671 million in fiscal 2002.

LIQUIDITY

As previously discussed, we use cash generated by operations as our primary source of liquidity,since we believe that internally generated cash flows are sufficient to support business operations,capital expenditures and the payment of stockholder dividends, in addition to a level of discretionaryinvestments and share repurchases. We are able to supplement this near term liquidity, if necessary,with broad access to capital markets and credit line facilities through various foreign subsidiaries aswell as with U.S. financial institutions.

We maintain debt levels that we establish through consideration of a number of factors, includingcash flow expectations, cash requirements for operations, investment plans (including acquisitions),share repurchase activities and the overall cost of capital. Outstanding debt at fiscal year end 2004decreased to $7.1 billion as compared to $7.6 billion at fiscal year end 2003, bearing weighted averageinterest rates of 5.3% and 5.2%, respectively. Short-term borrowings increased to $2.5 billion atOctober 31, 2004 from $1.1 billion at October 31, 2003. The increase reflects $1.5 billion of GlobalNotes maturing in 2005. In addition, during fiscal 2004, we issued $4.1 billion and repaid $4.3 billion of

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Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

commercial paper. HP did not issue long-term debt during fiscal 2004, although HP assumedinsignificant amounts in association with our acquisitions.

We entered into a six-year revolving agreement during the third quarter of fiscal 2004 to sellcertain trade receivables without recourse. Sold receivables are then collected by the third party, withthe sales of receivables limited only by the outstanding maximum balance of receivables not yetcollected by the third party. Trade receivables of approximately 680 million euros were sold duringfiscal 2004, primarily during the fourth quarter. As of October 31, 2004, the aggregate receivables soldbut not yet collected by the third party were approximately 253 million euros, compared to themaximum amount of 600 million euros permitted under the agreement at that date. Theimplementation of this agreement did not have a material impact on HP’s DSO as utilization of thisprogram was limited to certain customer receivables that HP already managed under an alternativeprompt payment program. Fees associated with this program do not differ materially from the cashdiscounts offered to these customers under the alternative prompt payment program.

We have the following resources available to obtain short-term or long-term financings, if we needadditional liquidity:

At October 31, 2004Original AmountAvailable Used Available

In millions

2002 registration statementDebt, global securities and up to $1,500 of Series B Medium

Term Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000 $2,000 $ 1,000Euro Medium Term Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 954 2,046U. S. Credit Facilities

Expiring March 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 — 1,500Expiring March 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 — 1,500

Lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,566 103 2,463Commercial paper programs

U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 — 4,000Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 306 194

$16,066 $3,363 $12,703

The securities issuable under the 2002 registration statement include notes with due dates of ninemonths or more from issuance. HP uses U.S. credit facilities for general corporate purposes, includingto support our U.S. commercial paper program. We have begun talks with lenders to renegotiate orreplace the 364-day credit facility expiring in March 2005. The lines of credit are uncommitted and areprimarily available through various foreign subsidiaries.

We do not have any rating downgrade triggers that would accelerate the maturity of a materialamount of our debt. However, a downgrade in our credit rating would increase the cost of borrowingsunder our credit facilities. Also, a downgrade in our credit rating could limit or, in the case of asignificant downgrade, preclude our ability to issue commercial paper under our current programs. Ifthis occurs, we would seek alternative sources of funding, including the issuance of notes under ourexisting shelf registration statement and our Euro Medium-Term Note Programme or our creditfacilities.

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Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

HP, and not the HPFS financing business, issued or assumed the vast majority of HP’s totaloutstanding debt. HPFS is a financial services organization and, like other financial services companies,has a business model that is asset-intensive in nature and therefore is more debt-dependent than ourother business segments. At October 31, 2004, HPFS had approximately $7.1 billion in net portfolioassets, which include short- and long-term financing receivables and operating lease assets.

Contractual Obligations

The impact that our contractual obligations as of October 31, 2004 are expected to have on ourliquidity and cash flow in future periods is as follows:

Payments Due by Period

Less than More thanTotal 1 Year 1-3 Years 3-5 Years 5 Years

In millions

Long-term debt, including capital leaseobligations(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,668 $1,861 $3,175 $ 565 $1,067

Operating lease obligations . . . . . . . . . . . . . . . . . . 2,181 521 759 541 360Purchase obligations(2) . . . . . . . . . . . . . . . . . . . . . . 1,007 452 287 150 118Restructuring-related obligations(3) . . . . . . . . . . . . . 294 195 59 23 17

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,150 $3,029 $4,280 $1,279 $1,562

(1) Amounts represent the expected cash payments of our long-term debt and include the fair valueadjustment. Included in our long-term debt are approximately $54 million of capital leaseobligations that are secured by certain equipment.

(2) Purchase obligations include agreements to purchase goods or services that are enforceable andlegally binding on HP and that specify all significant terms, including fixed or minimum quantitiesto be purchased; fixed, minimum or variable price provisions; and the approximate timing of thetransaction. Purchase obligations exclude agreements that are cancelable without penalty. Thesepurchase obligations are related principally to cost of sales, inventory and other items.

(3) As a result of our approved restructuring plans, we expect future cash expenditures ofapproximately $294 million, primarily for employee severance and other employee benefits andfacilities costs. Of this amount, $288 million is recorded on our Consolidated Balance Sheet atOctober 31, 2004, and $6 million will be expensed in future periods as the costs are incurred orthe requirements to record the costs as a liability are met.

In addition to the contractual obligations noted in the table above, we also have the followingfunding commitments.

In fiscal 2004, we made contributions of approximately $564 million to our pension plans and$49 million to our post-retirement benefit plans, for a total of $613 million, compared to a total ofapproximately $1.2 billion in fiscal 2003. We estimate that we will contribute a total of approximately$910 million to the pension and post-retirement plans during fiscal 2005. Our funding policy is tocontribute cash to our pension plans so that we meet the minimum contribution requirements, asestablished by local government funding and taxing authorities. In the current fiscal year, we willcontinue to contribute cash to our global pension plans in amounts that are consistent with localfunding requirements and tax considerations.

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Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

We issued approximately 53 million non-transferable contingent value rights (‘‘CVRs’’) inconnection with our acquisition of Indigo that entitle each holder to a one-time contingent cashpayment of up to $4.50 per CVR, based on the achievement of certain cumulative revenue results overa three-year period. The future cash pay-out, if any, of the CVRs will be payable after a three-yearperiod that began on April 1, 2002 and could result in a maximum obligation of $237 million. HP hasnot incurred a liability associated with CVRs as of October 31, 2004.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationshipswith unconsolidated entities or financial partnerships, such as entities often referred to as structuredfinance or special purpose entities (‘‘SPEs’’), which would have been established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As ofOctober 31, 2004, we are not involved in any material unconsolidated SPE transactions.

Indemnifications

In the ordinary course of business, HP enters into contractual arrangements under which HP mayagree to indemnify the third party to such arrangement from any losses incurred relating to the servicesthey perform on behalf of HP or for losses arising from certain events as defined within the particularcontract, which may include, for example, litigation or claims relating to past performance. Suchindemnification obligations may not be subject to maximum loss clauses. Historically, payments maderelated to these indemnifications have been immaterial.

FACTORS THAT COULD AFFECT FUTURE RESULTS

Because of the following factors, as well as other variables affecting our operating results, pastfinancial performance may not be a reliable indicator of future performance, and historical trendsshould not be used to anticipate results or trends in future periods.

The competitive pressures we face could harm our revenue, gross margin and prospects.

We encounter aggressive competition from numerous and varied competitors in all areas of ourbusiness, and our competitors may target our key market segments. We compete primarily on the basisof technology, performance, price, quality, reliability, brand, distribution, range of products andservices, account relationships, customer service and support, security, and availability of applicationsoftware. If our products, services, support and cost structure do not enable us to compete successfullybased on any of those criteria, it could harm our operations, results and prospects. Further, we mayhave to continue to lower the prices of many of our products and services to stay competitive, while atthe same time trying to maintain or improve revenue and gross margin. Because our business model isbased on providing innovative and high quality products, we may spend a proportionately greateramount on research and development than some of our competitors. If we cannot proportionatelydecrease our cost structure on a timely basis in response to competitive price pressures, our grossmargin and therefore our profitability could be adversely affected. In addition, if our pricing and otherfactors are not sufficiently competitive, or if there is an adverse reaction to our product decisions, wemay lose market share in certain areas, which could adversely affect our revenue and prospects. Even ifwe are able to maintain or increase market share for a particular product, revenue could decline due toincreased competition from other types of products or because the product is in a maturing industry.Industry consolidation may affect competition by creating larger, more homogeneous and potentially

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Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

stronger competitors in the markets in which we compete, and our competitors also may affect ourbusiness by entering into exclusive arrangements with existing or potential customers or suppliers.

If we cannot continue to develop, manufacture and market products and services that meet customerrequirements for innovation and quality, our revenue and gross margin may suffer.

The process of developing new high technology products and services and enhancing existingproducts and services is complex, costly and uncertain, and any failure by us to anticipate customers’changing needs and emerging technological trends accurately could significantly harm our market shareand results of operations. We must make long-term investments, develop or obtain appropriateintellectual property and commit significant resources before knowing whether our predictions willaccurately reflect customer demand for our products and services. After we develop a product, we mustbe able to manufacture appropriate volumes quickly and at low costs. To accomplish this, we mustaccurately forecast volumes, mix of products and configurations that meet customer requirements, andwe may not succeed at all or within a given product’s life cycle. Any delay in the development,production or marketing of a new product could result in our not being among the first to market,which could further harm our competitive position. In addition, in the course of conducting ourbusiness, we must adequately address quality issues associated with our products and services, includingdefects in our engineering, design and manufacturing processes, as well as defects in third partycomponents included in our products. In order to address quality issues, we work extensively with ourcustomers and suppliers and engage in product testing to determine the cause of the problem and todetermine appropriate solutions. However, we may have limited ability to control quality issues,particularly with respect to faulty components manufactured by third parties. If we are unable todetermine the cause, find an appropriate solution or offer a temporary fix (or ‘‘patch’’), we may delayshipment to customers, which would delay revenue recognition and could adversely affect our revenueand reported results. Finding solutions to quality issues can be expensive and may result in additionalwarranty, replacement and other costs, adversely affecting our profits. In addition, quality issues canimpair our relationships with new or existing customers and adversely affect our reputation, whichcould have a material adverse effect on our operating results.

If we do not effectively manage our product and services transitions, our revenue may suffer.

Many of the industries in which we compete are characterized by rapid technological advances inhardware performance, software functionality and features; frequent introduction of new products;short product life cycles; and continual improvement in product price characteristics relative to productperformance. If we do not make an effective transition from existing products and services to futureofferings, our revenue may decline. Among the risks associated with the introduction of new productsand services are delays in development or manufacturing, variations in costs, delays in customerpurchases in anticipation of new introductions, difficulty in predicting customer demand for the newofferings and effectively managing inventory levels in line with anticipated demand, risks associatedwith customer qualification and evaluation of new products and the risk that new products may havequality or other defects or may not be supported adequately by application software. Our revenue andgross margin also may suffer due to the timing of product or service introductions by our suppliers andcompetitors. This is especially challenging when a product has a short life cycle or a competitorintroduces a new product just before our own product introduction. Furthermore, sales of our newproducts and services may replace sales, or result in discounting, of some of our current offerings,offsetting the benefit of even a successful introduction. There also may be overlaps in the currentproducts and services of HP and portfolios acquired through mergers and acquisitions that we must

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Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

manage. In addition, it may be difficult to ensure performance of new customer contracts in accordancewith our revenue, margin and cost estimates, and to achieve operational efficiencies embedded in ourestimates. Given the competitive nature of our industry, if any of these risks materialize, future demandfor our products and services and our results of operations may suffer.

Our revenue, cost of sales, and expenses may suffer if we cannot continue to license or enforce theintellectual property rights on which our business depends or if third parties assert that we violate theirintellectual property rights.

We rely upon patent, copyright, trademark and trade secret laws in the United States and similarlaws in other countries, and agreements with our employees, customers, suppliers and other parties, toestablish and maintain our intellectual property rights in technology and products used in ouroperations. However, any of our direct or indirect intellectual property rights could be challenged,invalidated or circumvented, or such intellectual property rights may not be sufficient to permit us totake advantage of current market trends or otherwise to provide competitive advantages, which couldresult in costly product redesign efforts, discontinuance of certain product offerings or othercompetitive harm. Further, the laws of certain countries do not protect our proprietary rights to thesame extent as do the laws of the United States. Therefore, in certain jurisdictions we may be unableto protect our proprietary technology adequately against unauthorized third-party copying or use, whichcould adversely affect our competitive position. Also, because of the rapid pace of technological changein the information technology industry, much of our business and many of our products rely on keytechnologies developed or licensed by third parties, and we may not be able to obtain or to continue toobtain licenses and technologies from these third parties at all or on reasonable terms, or such thirdparties may demand cross-licenses. Third parties also may claim that we or customers indemnified by usare infringing upon their intellectual property rights. Even if we believe that the claims are withoutmerit, the claims can be time-consuming and costly to defend and divert management’s attention andresources away from our business. Claims of intellectual property infringement also might require us toredesign affected products, enter into costly settlement or license agreements or pay costly damageawards. Even if we have an agreement to indemnify us against such costs, the indemnifying party maybe unable to uphold its contractual agreements to us. If we cannot or do not license the infringedtechnology at all or on reasonable terms or substitute similar technology from another source, ouroperations could suffer. Further, our costs of operations could be affected on an ongoing basis by theimposition of copyright levies or similar fees by rights holders or collection agencies in certainjurisdictions, primarily in Europe. In addition, it is possible that as a consequence of a merger oracquisition transaction third parties may obtain licenses to some of our intellectual property rights orour business may be subject to certain restrictions that were not in place prior to the transaction.Consequently, we may lose a competitive advantage with respect to these intellectual property rights orwe may be required to enter into costly arrangements in order to terminate or limit these agreements.

Economic uncertainty could affect adversely, our revenue, gross margin and expenses.

Our revenue and gross margin depend significantly on general economic conditions and thedemand for computing and imaging products and services in the markets in which we compete.Economic weakness and constrained IT spending has previously resulted, and may result in the future,in decreased revenue, gross margin, earnings or growth rates and problems with our ability to manageinventory levels and realize customer receivables. In addition, customer financial difficulties havepreviously resulted, and could result in the future, in increases in bad debt write-offs and additions toreserves in our receivables portfolio, inability by our lessees to make required lease payments and

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Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)

reduction in the value of leased equipment upon its return to us compared to the value estimated atlease inception. We also have experienced, and may experience in the future, gross margin declines incertain businesses, reflecting the effect of items such as competitive pricing pressures, inventory write-downs, charges associated with the cancellation of planned production line expansion, and increases inpension and post-retirement benefit expenses. Economic downturns also may lead to restructuringactions and associated expenses and impairment of investments. Uncertainty about future economicconditions makes it difficult to forecast operating results and to make decisions about futureinvestments. Delays or reductions in information technology spending could have a material adverseeffect on demand for our products and services and consequently our results of operations, prospectsand stock price.

Terrorist acts, conflicts and wars may seriously harm our business and revenue, costs and expenses andfinancial condition and stock price.

Terrorist acts, conflicts or wars (wherever located around the world) may cause damage ordisruption to HP, our employees, facilities, partners, suppliers, distributors, resellers or customers, whichcould significantly impact our revenue, costs and expenses and financial condition. Terrorist attackscreate many economic and political uncertainties, some of which may materially harm our business andresults of operations. The potential for future attacks, the national and international responses toattacks or perceived threats to national security, and other actual or potential conflicts or wars,including the ongoing military operations in Iraq, have created many economic and politicaluncertainties that could adversely affect our business, results of operations and stock price in ways thatwe cannot presently predict. In addition, as a major multi-national company with headquarters andsignificant operations located in the United States, actions against or by the United States may impactour business or employees. We are predominantly uninsured for losses and interruptions caused byterrorist acts, conflicts and wars.

Due to the international nature of our business, political or economic changes or other factors could harmour future revenue, costs and expenses and financial condition.

Sales outside the United States make up more than half of our revenue. Our future revenue, grossmargin, expenses and financial condition also could suffer due to a variety of international factors,including:

• ongoing instability or changes in a country’s or region’s economic or political conditions,including inflation, recession, interest rate fluctuations and actual or anticipated military orpolitical conflicts;

• currency fluctuations, particularly in the euro and the Japanese yen, which contribute tovariations in sales of products and services in impacted jurisdictions and also affect our reportedresults expressed in U.S. dollars;

• longer accounts receivable cycles and financial instability among customers;

• trade regulations and procedures and actions affecting production, pricing and marketing ofproducts;

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• local labor conditions and regulations;

• changes in the regulatory or legal environment;

• differing technology standards or customer requirements;

• import, export or other business licensing requirements or requirements relating to makingforeign direct investments, which could affect our ability to obtain favorable terms forcomponents or lead to penalties or restrictions;

• difficulties associated with repatriating cash generated or held abroad in a tax-efficient mannerand changes in tax laws;

• fluctuations in freight costs and disruptions at important geographic points of exit and entry;

• natural disasters, such as earthquakes, tsunamis and typhoons; and

• medical disasters, such as Severe Acute Respiratory Syndrome.

The factors described above also could disrupt our product and component manufacturing and keysuppliers located outside of the United States. For example, we rely on manufacturers in Taiwan for theproduction of notebook computers and other suppliers in Asia for product assembly and manufacture.

Business disruptions could seriously harm our future revenue and financial condition and increase our costsand expenses.

Our worldwide operations could be subject to natural disasters and other business disruptions,which could seriously harm our revenue and financial condition and increase our costs and expenses.Our corporate headquarters, and a portion of our research and development activities, are located inCalifornia, and other critical business operations and some of our suppliers are located in Californiaand Asia, near major earthquake faults. The ultimate impact on us, our significant suppliers and ourgeneral infrastructure of being located near major earthquake faults is unknown, but our revenue,profitability and financial condition could suffer in the event of a major earthquake and related naturaldisasters. In addition, some areas, including California and parts of the East Coast and Midwest of theUnited States, have previously experienced, and may experience in the future, major power shortagesand blackouts. These blackouts could cause disruptions to our operations or the operations of oursuppliers, distributors and resellers, or customers. We are predominantly self-insured for losses andinterruptions caused by earthquakes, power shortages, telecommunications failures, water shortages,tsunamis, floods, typhoons, fires, extreme weather conditions and other natural or manmade disasters.

If we fail to manage distribution of our products and services properly, our revenue, gross margin andprofitability could suffer.

We use a variety of different distribution methods to sell our products and services, includingthird-party resellers and distributors and both direct and indirect sales to both enterprise accounts andconsumers. Successfully managing the interaction of our direct and indirect channel efforts to reach allof the potential customer segments for our products and services is a complex process. Moreover, sinceeach distribution method has distinct risks and gross margins, our failure to implement the most

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advantageous balance in the delivery model for our products and services could adversely affect ourrevenue and gross margins and therefore profitability. Other distribution risks are described below.

• Our financial results could be materially adversely affected due to channel conflicts or if the financialconditions of our channel partners were to weaken.

Our future operating results may be adversely affected by any conflicts that might arisebetween our various sales channels, the loss or deterioration of any alliance or distributionarrangement or the loss of retail shelf space. Moreover, some of our wholesale and retaildistributors may have insufficient financial resources and may not be able to withstandchanges in business conditions, including economic weakness and industry consolidation.Revenue from indirect sales could suffer and we could experience disruptions in distribution ifour distributors’ financial conditions or operations weaken.

• Our inventory management will be complex as we continue to sell a significant mix of productsthrough distributors.

We must manage inventory effectively, particularly with respect to sales to distributors, whichinvolves forecasting demand and pricing issues. Distributors may increase orders duringperiods of product shortages, cancel orders if their inventory is too high or delay orders inanticipation of new products. Distributors also may adjust their orders in response to thesupply of our products and the products of our competitors and seasonal fluctuations inend-user demand. Our reliance upon indirect distribution methods may reduce visibility todemand and pricing issues, and therefore make forecasting more difficult. If we have excessinventory, we may have to reduce our prices and write down inventory. Moreover, our use ofindirect distribution channels may limit our willingness or ability to adjust prices quickly andotherwise to respond to pricing changes by competitors. We also may have limited ability toestimate future product rebate redemptions in order to price our products effectively.

We depend on third party suppliers, and our revenue and gross margin could suffer if we fail to managesupplier issues properly.

Our manufacturing operations depend on our ability to anticipate our needs for components andproducts and our suppliers’ ability to deliver sufficient quantities of quality components and products atreasonable prices in time for us to meet critical manufacturing and distribution schedules. Given thewide variety of systems, products and services that we offer, the large number of our suppliers andcontract manufacturers that are dispersed across the globe, and the long lead times that are required tomanufacture, assemble and deliver certain components and products, problems could arise in planningproduction and managing inventory levels that could seriously harm us. We also rely on third partysuppliers for the provision of contingent workers, and our failure to manage our use of such workerseffectively could adversely affect our results of operations. We also could be exposed to various legalclaims relating to their status. Other supplier problems that we could face include componentshortages, excess supply and risks related to fixed-price contracts that would require us to pay morethan the open market price, as described below.

• Shortages. Occasionally we may experience a shortage of, or a delay in receiving, certainsupplies as a result of strong demand, capacity constraints or other problems experienced bysuppliers. If shortages or delays persist, the price of these supplies may increase, we may beexposed to quality issues or the supplies may not be available at all. We may not be able tosecure enough supplies at reasonable prices or of acceptable quality to build products or provide

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services in a timely manner in the quantities or specifications needed. Accordingly, our revenueand gross margin could suffer as we could lose time-sensitive sales, incur additional freight costsor be unable to pass on price increases to our customers. If we cannot adequately address supplyissues, we might have to reengineer some products or service offerings, resulting in further costsand delays.

• Oversupply. In order to secure supplies for the provision of products or services or to secureworkers in critical areas, at times we may make advance payments to suppliers, or we may enterinto non-cancelable commitments with vendors. If we fail to anticipate customer demandproperly, a temporary oversupply could result in excess or obsolete components or we couldhave an oversupply of workers in certain areas, any of which could adversely affect our grossmargin. Our ability to manage the size of, and costs associated with, the contingent workforcemay be subject to additional constraints imposed by local laws.

• Long-term pricing commitments. As a result of binding price or purchase commitments withvendors, we may be obligated to purchase supplies or services or to retain workers at prices thatare higher than those available in the current market and be limited in our ability to respond tochanging market conditions. In the event that we become committed to purchase supplies or toretain workers for prices in excess of the current market price, we may be at a disadvantage tocompetitors who have access to components or workers at lower prices, and our gross margincould suffer. Our use of single source suppliers for certain components could exacerbate oursupplier issues. We obtain a significant number of components from single sources due totechnology, availability, price, quality or other considerations. In addition, new products that weintroduce may utilize custom components obtained from only one source initially until we haveevaluated whether there is a need for additional suppliers. The performance of such singlesource suppliers may affect the quality, quantity and price of supplies to HP.

Impairment of our investment portfolio could harm our net earnings.

We have an investment portfolio that includes minority equity and debt investments. In most cases,we do not attempt to reduce or eliminate our market exposure on these investments and may incurlosses related to the impairment of these investments and therefore charges to net earnings. Some ofour investments are in public and privately-held companies that are still in the start-up or developmentstage, which have inherent risks because the technologies or products they have under developmentnever may become successful. Furthermore, the values of our investments in publicly-traded companiesare subject to significant market price volatility. We often couple our investments in technologycompanies with a strategic commercial relationship. Our commercial agreements with these companiesmay not be sufficient to allow us to obtain and integrate such products and services into our offeringsor otherwise benefit from the relationship, and third parties, including competitors, subsequently mayacquire these companies. Economic weakness could impact our investment portfolio in the future.

The revenue and profitability of our operations have historically varied.

Our revenue and profit margins vary among our products and services, customer groups andgeographic markets and therefore will be different in future periods than our current revenue andprofit margins. Overall gross margins and profitability in any given period are dependent partially onthe product, customer and geographic mix reflected in that period’s net revenue. In particular, IPG andcertain of its business units such as printer supplies contribute significantly to our profitability. Certainsegments, and ESS in particular, have a higher fixed cost structure than others and may experience

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significant operating profit volatility on a quarterly basis. In addition, newer geographic markets may berelatively less profitable due to investments associated with entering those markets and local pricingpressures. Market trends, competitive pressures, seasonal rebates, increased component or shippingcosts, regulatory impacts and other factors may result in reductions in revenue or pressure on grossmargins in a given period, which may necessitate adjustments to our operations.

Unanticipated changes in HP’s tax rates or exposure to additional income tax liabilities could affect ourprofitability.

We are subject to income taxes in both the United States and various foreign jurisdictions, and ourdomestic and international tax liabilities are subject to the allocation of expenses in differentjurisdictions. Our effective tax rates could be adversely affected by changes in the mix of earnings incountries with differing statutory tax rates, in the valuation of deferred tax assets and liabilities or intax laws or by material audit assessments, which could affect our profitability. In particular, the carryingvalue of deferred tax assets, which are predominantly in the United States, is dependent on our abilityto generate future taxable income in the United States. In addition, the amount of income taxes we payis subject to ongoing audits in various jurisdictions, and a material assessment by a governing taxauthority could affect our profitability. Further, if we elect to repatriate cash held outside the UnitedStates pursuant to The American Jobs Creation Act of 2004, our tax rate may increase even if by alesser amount than without such legislation.

Our sales cycle makes planning and inventory management difficult and future financial results lesspredictable.

Our quarterly sales have reflected a pattern in which a disproportionate percentage of suchquarters’ total sales occur toward the end of such quarter, and this trend has become more pronouncedin recent periods. This uneven sales pattern makes prediction of revenue, earnings and working capitalfor each financial period difficult, increases the risk of unanticipated variations in quarterly results andfinancial condition, and places pressure on our inventory management and logistics systems. Ifpredicted demand is substantially greater than orders, there will be excess inventory. Alternatively, iforders substantially exceed predicted demand, we may not be able to fulfill all of the orders received inthe last few weeks of each quarter. Other developments late in a quarter, such as a systems failure,component pricing movements or global logistics disruptions, could adversely impact inventory levelsand results of operations in a manner that is disproportionate to the number of days in the quarteraffected. In addition, we experience some seasonal trends in the sale of our products. For example,sales to governments (particularly sales to the U.S. government) are often stronger in the third calendarquarter, consumer sales are often stronger in the fourth calendar quarter, and many customers whosefiscal and calendar years are the same spend their remaining capital budget authorizations in the fourthcalendar quarter prior to new budget constraints in the first calendar quarter of the following year.European sales are often weaker during the summer months. Demand during the spring and earlysummer also may be adversely impacted by market anticipation of seasonal trends. Moreover, to theextent that we introduce new products in anticipation of seasonal demand trends, our discounting ofexisting products may adversely affect our gross margin prior to or shortly after such product launches.Overall, our third fiscal quarter is typically our weakest and our fourth fiscal quarter our strongest.Many of the factors that create and affect seasonal trends are beyond our control.

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Any failure by us to execute planned cost reductions successfully could result in total costs and expenses thatare greater than expected.

Historically, we have undertaken restructuring plans to bring operational expenses to appropriatelevels for each of our businesses, while simultaneously implementing extensive new company-wideexpense-control programs. In connection with the Compaq acquisition and other cost alignment efforts,we announced workforce restructurings as well as reductions through our early retirement programsinvolving approximately 26,200 employees worldwide in fiscal 2003 and 2002. Hiring in key areas offsetsome of these workforce reductions. We expect additional workforce reductions in the first half of 2005,and we may have further workforce reductions in the future. Significant risks associated with theseactions and other workforce management issues that may impair our ability to achieve anticipated costreductions or that may otherwise harm our business include delays in implementation of anticipatedworkforce reductions in highly regulated locations outside of the United States, particularly in Europeand Asia, redundancies among restructuring programs, decreases in employee morale and the failure tomeet operational targets due to the loss of employees, particularly sales employees.

In order to be successful, we must retain and motivate key employees, and failure to do so could seriouslyharm us.

In order to be successful, we must retain and motivate executives and other key employees,including those in managerial, technical, sales, marketing and IT support positions. In particular, hiringand retaining qualified engineers, skilled solutions providers in the IT support business and qualifiedsales representatives is critical to our future. Competition for experienced management and technical,sales, marketing and support personnel in the IT industry can be intense. The loss of key employeescould have a significant impact on our operations and stock price. We also must continue to motivateemployees and keep them focused on HP’s strategies and goals.

Decreased effectiveness of equity compensation could adversely affect our ability to attract and retainemployees, and proposed changes in accounting for equity compensation could adversely affect earnings.

We have historically used stock options and other forms of equity-related compensation as keycomponents of our total rewards employee compensation program in order to align employees’interests with the interests of our stockholders, encourage employee retention, and provide competitivecompensation packages. In recent periods, many of HP’s employee stock options have had exerciseprices in excess of HP’s stock price, which reduces their value to employees and could affect our abilityto retain or attract present and prospective employees. In addition, the Financial Accounting StandardsBoard and other agencies have finalized changes to U.S. generally accepted accounting principles thatwill require HP and other companies to record a charge to earnings for employee stock option grantsand other equity incentives. Moreover, applicable stock exchange listing standards relating to obtainingstockholder approval of equity compensation plans could make it more difficult or expensive for us togrant options to employees in the future. As a result, we may incur increased compensation costs,change our equity compensation strategy or find it difficult to attract, retain and motivate employees,any of which could materially adversely affect our business.

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HP’s stock price has historically fluctuated and may continue to fluctuate.

HP’s stock price, like that of other technology companies, can be volatile. Some of the factors thatcan affect our stock price are:

• the announcement of new products, services or technological innovations by us or ourcompetitors;

• quarterly increases or decreases in revenue, gross margin or earnings, and changes in thebusiness, organizational structure, operations or prospects of HP or any of its business units;

• changes in quarterly revenue or earnings estimates by the investment community and variationsbetween actual and anticipated financial results; and

• speculation in the press or investment community about our strategic position, financialcondition, financial reporting, results of operations, business acquisitions or significanttransactions.

General or industry-specific market conditions or stock market performance or domestic orinternational macroeconomic and geopolitical factors unrelated to HP’s performance also may affectthe price of HP common stock. For these reasons, investors should not rely on recent trends to predictfuture stock prices, financial condition, or results of operations or cash flows. In addition, followingperiods of volatility in a company’s securities, securities class action litigation against a company issometimes instituted. This type of litigation could result in substantial costs and the diversion ofmanagement time and resources.

System security risks and systems integration issues could disrupt our internal operations or informationtechnology services provided to customers, which could harm our revenue, increase our expenses and harmour reputation and stock price.

Experienced computer programmers and hackers may be able to penetrate our network securityand misappropriate our confidential information or that of third parties, create system disruptions orcause shutdowns. As a result, we could incur significant expenses in addressing problems created bysecurity breaches of our network. Moreover, we could lose existing or potential customers forinformation technology outsourcing services or other information technology solutions, or incursignificant expenses in connection with our customers’ system failures. In addition, sophisticatedhardware and operating system software and applications that we produce or procure from third partiesmay contain defects in design and manufacture, including ‘‘bugs’’ and other problems that canunexpectedly interfere with the operation of the system. The costs to eliminate or alleviate securityproblems, viruses and bugs could be significant, and the efforts to address these problems could resultin interruptions, delays or cessation of service that may impede sales, manufacturing, distribution orother critical functions.

Portions of our IT infrastructure also may experience interruptions, delays or cessations of serviceor produce errors in connection with ongoing systems integration work. In particular, in connectionwith the Compaq integration, we are in the process of implementing new general ledger, ordermanagement and data warehouse systems to replace our current systems. As a part of this effort, weare rationalizing various legacy systems, upgrading existing software applications and implementing newdata management applications to administer our business information. We may not be successful inimplementing the new systems, and transitioning data and other aspects of the process could beexpensive, time consuming, disruptive and resource intensive. Any disruptions that may occur in the

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implementation of the new systems or any future systems could adversely affect our ability to report inan accurate and timely manner the results of our consolidated operations, our business segment results,our financial position and cash flows. Disruptions to these systems also could adversely impact ourability to fulfill orders and interrupt other operational processes. Delayed sales, lower margins or lostcustomers resulting from these disruptions could adversely affect our financial results, stock price andreputation.

Any failure by us to manage acquisitions, divestitures and other significant transactions successfully couldharm our financial results, business and prospects.

As part of our business strategy, we frequently engage in discussions with third parties regarding,and enter into agreements relating to, possible acquisitions, strategic alliances, joint ventures,divestitures and outsourcing transactions in order to further our business objectives, and in many cases,to manage our product and technology portfolios. In order to pursue this strategy successfully, we mustidentify suitable candidates for these transactions, complete these transactions, some of which may belarge and complex, and manage post-closing issues such as the integration of acquired companies oremployees. Integration and other risks of acquisitions, strategic alliances, joint ventures and outsourcingtransactions can be more pronounced for larger and more complicated transactions, or if multipletransactions are pursued simultaneously. However, if we fail to identify and complete successfullytransactions that further our strategic objectives, we may be required to expend resources to developproducts and technology internally, we may be at a competitive disadvantage or we may be adverselyaffected by negative market perceptions, any of which may have a material adverse effect on ourrevenue and selling, general and administrative expenses. Integration issues are complex,time-consuming and expensive and, without proper planning and implementation, could significantlydisrupt our business. The challenges involved in integration include:

• combining product offerings and entering into new markets in which we are not experienced;

• convincing customers and distributors that the transaction will not diminish client servicestandards or business focus, preventing customers and distributors from deferring purchasingdecisions or switching to other suppliers (which could result in our incurring additionalobligations in order to address customer uncertainty), and coordinating sales, marketing anddistribution efforts;

• consolidating and rationalizing corporate IT infrastructure, which may include multiple legacysystems from various acquisitions and integrating software code;

• minimizing the diversion of management attention from ongoing business concerns;

• persuading employees that business cultures are compatible, maintaining employee morale andretaining key employees, integrating employees into HP, correctly estimating employee benefitcosts and implementing restructuring programs;

• coordinating and combining administrative, manufacturing, research and development and otheroperations, subsidiaries, facilities and relationships with third parties in accordance with locallaws and other obligations while maintaining adequate standards, controls and procedures;

• achieving savings from supply chain integration; and

• managing integration issues shortly after or pending the completion of other independenttransactions.

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We evaluate and enter into significant transactions, including acquisitions, strategic alliances, jointventures, divestitures and outsourcing agreements, on an ongoing basis. We may not fully realize all ofthe anticipated benefits of any transaction to the extent anticipated, and the timeframe for achievingbenefits of a transaction may depend partially upon the actions of employees, suppliers or other thirdparties. In addition, the pricing and other terms of our contracts for significant transactions require usto make estimates and assumptions at the time we enter into these contracts, and, during the course ofour due diligence, we may not identify all of the factors necessary to estimate our costs accurately. Anyincreased or unexpected costs, unanticipated delays or failure to achieve contractual obligations couldmake these agreements less profitable or unprofitable.

Managing acquisitions, outsourcing transactions, strategic alliances, joint ventures, and divestituresrequires varying levels of management resources, which may divert our attention from other businessoperations. These transactions also have resulted and in the future may result in significant costs andexpenses and charges to earnings, including those related to severance pay, early retirement costs,employee benefit costs, asset impairment charges, charges from the elimination of duplicative facilitiesand contracts, IPR&D charges, inventory adjustments, legal, accounting and financial advisory fees, andrequired payments to executive officers and key employees under retention plans. Moreover, HP hasincurred and will incur additional depreciation and amortization expense over the useful lives of certainassets acquired in connection with transactions, and, to the extent that the value of goodwill orintangible assets with indefinite lives acquired in connection with a transaction becomes impaired, wemay be required to incur additional material charges relating to the impairment of those assets. Inorder to complete an acquisition, we may issue common stock, potentially creating dilution for existingstockholders, or borrow, affecting our financial condition and potentially our credit ratings. Any prioror future downgrades in our credit rating associated with an acquisition could adversely affect ourability to borrow and result in more restrictive borrowing terms. In addition, HP’s effective tax rate onan ongoing basis is uncertain and extraordinary transactions could impact our effective tax rate. As aresult, any completed, pending or future transactions may contribute to financial results that differ fromthe investment community’s expectations in a given quarter.

Unforeseen environmental costs could impact our future net earnings.

Some of our operations use substances regulated under various federal, state and internationallaws governing the environment, including those governing the discharge of pollutants into the air andwater, the management and disposal of hazardous substances and wastes and the cleanup ofcontaminated sites. Many of our products are subject to various federal, state and international lawsgoverning chemical substances in products, including those regulating the manufacture and distributionof chemical substances and those restricting the presence of certain substances in electronics products.We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, third-party property damage or personal injury claims if we were to violate or become liable underenvironmental laws or if our products become non-compliant with environmental laws. We also faceincreasing complexity in our product design and procurement operations as we adjust to new andfuture requirements relating to the materials composition of our products, including the restrictions onlead and certain other substances that will apply to specified electronics products put on the market inthe European Union as of July 1, 2006 (Restriction of Hazardous Substances Directive) and similarlegislation currently proposed for China. The ultimate costs under environmental laws and the timingof these costs are difficult to predict, and liability under some environmental laws relating tocontaminated sites can be imposed retroactively and on a joint and several basis. We also could facesignificant costs and liabilities in connection with product take-back legislation. The European Union

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has finalized the Waste Electrical and Electronic Equipment Directive, which makes producers ofelectrical goods, including computers and printers, financially responsible for specified collection,recycling, treatment and disposal of past and future covered products. This deadline to enact andimplement the directive by individual European Union governments generally was August 13, 2004,although extensions were granted to some countries (such legislation, together with the directive, the‘‘WEEE Legislation’’), and producers are to financially responsible under the WEEE Legislationbeginning in August 2005. HP’s potential liability resulting from the WEEE Legislation may besubstantial. Similar legislation has been or may be enacted in other geographies, including in theUnited States and Japan, the cumulative impact of which could be significant. It is our policy to applystrict standards for environmental protection to sites inside and outside the United States, even whenwe are not subject to local government regulations. We record a liability for environmental remediationand other environmental costs when we consider the costs to be probable and the amount of the costscan be reasonably estimated.

Some anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisionsof Delaware law, could impair a takeover attempt.

We have provisions in our certificate of incorporation and bylaws, each of which could have theeffect of rendering more difficult or discouraging an acquisition deemed undesirable by our Board ofDirectors. These include provisions:

• authorizing blank check preferred stock, which could be issued with voting, liquidation, dividendand other rights superior to our common stock;

• limiting the liability of, and providing indemnification to, directors and officers;

• specifying that stockholders may take action only at a duly called annual or special meeting ofstockholders and otherwise in accordance with our bylaws and limiting the ability of ourstockholders to call special meetings;

• requiring advance notice of stockholder proposals for business to be conducted at meetings ofHP stockholders and for nominations of candidates for election to our Board of Directors;

• requiring a two-thirds stockholder vote to amend certain bylaws relating to stockholder meetings,the Board of Directors and indemnification; and

• controlling the procedures for conduct of Board and stockholder meetings and election,appointment and removal of directors.

These provisions, alone or together, could deter or delay hostile takeovers, proxy contests andchanges in control or management of HP. As a Delaware corporation, HP also is subject to provisionsof Delaware law, including Section 203 of the Delaware General Corporation Law, which preventssome stockholders from engaging in certain business combinations without approval of the holders ofsubstantially all of HP’s outstanding common stock.

Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect ofdelaying or deterring a change in control could limit the opportunity for our stockholders to receive apremium for their shares of HP common stock, and also could affect the price that some investors arewilling to pay for HP common stock.

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ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.

In the normal course of business, we are exposed to foreign currency exchange rate, interest rateand equity price risks that could impact our financial position results of operations. Our riskmanagement strategy with respect to these three market risks includes the use of derivative financialinstruments. We use derivatives only to manage existing underlying exposures of HP. Accordingly, wedo not use derivative contracts for speculative purposes. Our risks, risk management strategy, and asensitivity analysis estimating the effects of changes in fair values for each of these exposures areoutlined below.

Foreign currency exchange rate risk

During the preceding fiscal year, we were exposed to foreign currency exchange rate risk inherentin our sales commitments, anticipated sales, anticipated purchases and assets, liabilities and debtdenominated in currencies other than the U.S. dollar. We transact business in approximately 40currencies worldwide, of which the most significant to our operations for the preceding fiscal year werethe euro, the Japanese yen and the British pound. For most currencies we are a net receiver of theforeign currency and therefore benefit from a weaker U.S. dollar and are adversely affected by astronger U.S. dollar relative to the foreign currency. Even where HP is a net receiver, certain expensefigures taken alone may be adversely affected by a weaker U.S. dollar. We use a combination offorward contracts and options designated as cash flow hedges to protect against the foreign currencyexchange rate risks inherent in our forecasted net revenue and, to a lesser extent, cost of salesdenominated in currencies other than the U.S. dollar. In addition, when debt is denominated in aforeign currency, HP may use swaps to exchange the foreign currency principal and interest obligationsfor U.S. dollar-denominated amounts to manage the exposure to changes in foreign currency exchangerates. HP also uses other derivatives not designated as hedging instruments under SFAS No. 133,consisting primarily of forward contracts to hedge foreign currency balance sheet exposures. HPrecognizes the gains and losses on foreign currency forward contracts in the same period as theremeasurement losses and gains of the related foreign currency-denominated exposures. Alternatively,HP may choose not to hedge the foreign currency risk associated with its foreign currency exposures ifsuch exposure acts as a natural foreign currency hedge for other offsetting amounts denominated in thesame currency.

We have performed a sensitivity analysis as of October 31, 2004 and 2003, using a modelingtechnique that measures the change in the fair values arising from a hypothetical 10% adversemovement in the levels of foreign currency exchange rates relative to the U.S. dollar, with all othervariables held constant. The analysis covers all of our foreign currency contracts offset by theunderlying exposures. The foreign currency exchange rates used were based on market rates in effect atOctober 31, 2004 and 2003. The sensitivity analysis indicated that a hypothetical 10% adversemovement in foreign currency exchange rates would result in a loss in the fair values of our foreignexchange derivative financial instruments, net of exposures, of $71 million at October 31, 2004 and$96 million at October 31, 2003.

Interest rate risk

During the preceding fiscal year, we also were exposed to interest rate risk related to our debt andinvestment portfolios and financing receivables. HP issues long-term debt in either U.S. dollars orforeign currencies based on market conditions at the time of financing. HP then typically uses interestrate swaps to modify the market risk exposures in connection with the debt to achieve primarily U.S.dollar LIBOR-based floating interest. The swap transactions generally involve the exchange of fixed forfloating interest payments. However, HP may choose not to swap fixed for floating interest payments ormay terminate a previously executed swap if the fixed rate positions provide a more beneficialrelationship between assets and liabilities. In order to hedge the fair value of certain fixed-rate

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investments, HP periodically may enter into interest rate swaps that convert fixed interest returns intovariable interest returns. HP uses cash flow hedges to hedge the variability of LIBOR-based interestincome received on certain variable-rate investments. HP also enters into interest rate swaps thatconvert variable rate interest returns into fixed-rate interest returns.

We have performed a sensitivity analysis as of October 31, 2004 and 2003, using a modelingtechnique that measures the change in the fair values arising from a hypothetical 10% adversemovement in the levels of interest rates across the entire yield curve, with all other variables heldconstant. The analysis covers our debt, investment instruments, financing receivables and interest rateswaps. The analysis uses actual maturities for the debt, investments and interest rate swaps andapproximate maturities for financing receivables. The discount rates used were based on the marketinterest rates in effect at October 31, 2004 and 2003. The sensitivity analysis indicated that ahypothetical 10% adverse movement in interest rates would result in a loss in the fair values of ourdebt and investment instruments and financing receivables, net of interest rate swap positions, of$2 million at October 31, 2004 and $7 million at October 31, 2003.

Equity price risk

During the preceding fiscal year, we also were exposed to equity price risk inherent in ourportfolio of publicly-traded equity securities, which had an estimated fair value of $70 million atOctober 31, 2004 and $97 million at October 31, 2003. We monitor our equity investments on aperiodic basis. In the event that the carrying value of the equity investment exceeds its fair value, andthe decline in value is determined to be other-than temporary, the carrying value is reduced to itscurrent fair value. Generally, we do not attempt to reduce or eliminate our market exposure on theseequity securities. However, we may use derivative transactions to hedge certain positions from time totime. We do not purchase our equity securities with the intent to use them for trading or speculativepurposes. A hypothetical 30% adverse change in the stock prices of our publicly-traded equity securitieswould result in a loss in the fair values of our marketable equity securities of $21 million atOctober 31, 2004 and $29 million at October 31, 2003. The aggregate cost of privately-held companiesand other investments is $388 million at October 31, 2004 and $577 million at October 31, 2003.

Actual gains and losses in the future may differ materially from the sensitivity analyses based onchanges in the timing and amount of interest rate, foreign currency exchange rate and equity pricemovements and our actual exposures and hedges.

81

ITEM 8. Financial Statements and Supplementary Data.

TABLE OF CONTENTS

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

Statement of Management Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

Quarterly Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

82

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders ofHewlett-Packard Company

We have audited the accompanying consolidated balance sheets of Hewlett-Packard Company andsubsidiaries as of October 31, 2004 and 2003, and the related consolidated statements of operations,stockholders’ equity and cash flows for each of the three years in the period ended October 31, 2004.Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). Thesefinancial statements and schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects,the consolidated financial position of Hewlett-Packard Company and subsidiaries at October 31, 2004and 2003, and the consolidated results of their operations and their cash flows for each of the threeyears in the period ended October 31, 2004, in conformity with U.S. generally accepted accountingprinciples. Also, in our opinion, the related financial statement schedule, when considered in relation tothe basic financial statements taken as a whole, presents fairly in all material respects the informationset forth therein.

As discussed in Note 1 to the consolidated financial statements, on November 1, 2002 theCompany changed its method of accounting for goodwill and intangible assets and in 2002 theCompany changed its method of depreciation for assets placed in service after May 1, 2002.

/s/ ERNST & YOUNG LLP

San Jose, CaliforniaNovember 16, 2004

83

Statement of Management Responsibility

HP’s management is responsible for the preparation, integrity and objectivity of the ConsolidatedFinancial Statements and other financial information included in HP’s 2004 Annual Report onForm 10-K. The Consolidated Financial Statements have been prepared in conformity with U.S.generally accepted accounting principles and reflect the effects of certain estimates and judgmentsmade by management.

HP’s management maintains an effective system of internal control that is designed to providereasonable assurance that assets are safeguarded and transactions are properly recorded and executedin accordance with management’s authorization. The system is regularly monitored by directmanagement review and by internal auditors who conduct an extensive program of audits throughoutHP. HP selects and trains qualified people who are provided with, and expected to adhere to, HP’sStandards of Business Conduct. These standards, which set forth the highest principles of businessethics and conduct, are a key element of HP’s control system.

HP’s Consolidated Financial Statements as of and for each of the three years in the period endedOctober 31, 2004 have been audited by Ernst & Young LLP, independent auditors. Their audits wereconducted in accordance with the standards of the Public Company Accounting Oversight Board(United States) and included a review of financial controls and tests of accounting records andprocedures as they respectively considered necessary in the circumstances.

The Audit Committee of the Board of Directors, which is composed entirely of independentdirectors, meets regularly with management, the internal auditors and the independent auditors toreview accounting, reporting, auditing and internal control matters. The Audit Committee has directand private access to both internal and external auditors.

/s/ CARLETON S. FIORINA /s/ ROBERT P. WAYMAN

Carleton S. Fiorina Robert P. WaymanChairman and Chief Executive Officer Executive Vice President and Chief Financial

Officer

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Statements of Operations

For the fiscal years ended October 31

2004 2003 2002

In millions, except per share amounts

Net revenue:Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $64,127 $58,826 $45,878Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,389 13,768 10,390Financing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389 467 320

Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,905 73,061 56,588

Costs and expenses:Cost of products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,359 43,619 34,127Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,791 10,031 7,477Financing interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 208 189Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . 3,506 3,651 3,368Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . 11,024 11,012 8,763Amortization of purchased intangible assets . . . . . . . . . . . . . . 603 563 402Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 800 1,780Acquisition-related charges . . . . . . . . . . . . . . . . . . . . . . . . . . 54 280 701In-process research and development charges . . . . . . . . . . . . . 37 1 793

Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,678 70,165 57,600Earnings (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . 4,227 2,896 (1,012)Interest and other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 21 52Gains (losses) on investments and early extinguishment of debt . . 4 (29) (75)Dispute settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (70) — 14Earnings (loss) before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,196 2,888 (1,021)Provision for (benefit from) taxes . . . . . . . . . . . . . . . . . . . . . . . 699 349 (118)Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,497 $ 2,539 $ (903)

Net earnings (loss) per share:Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.16 $ 0.83 $ (0.36)

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.15 $ 0.83 $ (0.36)

Weighted average shares used to compute net earnings (loss) pershare:Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,024 3,047 2,499

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,055 3,063 2,499

The accompanying notes are an integral part of these Consolidated Financial Statements.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets

October 31

2004 2003

In millions, exceptpar value

ASSETSCurrent assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,663 $14,188Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311 403Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,226 8,921Financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,945 3,026Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,071 6,065Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,685 8,351

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,901 40,954Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,649 6,482Long-term financing receivables and other assets . . . . . . . . . . . . . . . . . . . . . . . . . 6,657 8,030Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,828 14,894Purchased intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,103 4,356Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $76,138 $74,716

LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities:

Notes payable and short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,511 $ 1,080Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,377 9,285Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,208 1,755Taxes on earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,709 1,599Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,958 2,496Accrued restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 709Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,632 8,545

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,588 25,469Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,623 6,494Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,363 5,007

Commitments and contingencies

Stockholders’ equity:Preferred stock, $0.01 par value (300 shares authorized; none issued) . . . . . . . . . — —Common stock, $0.01 par value (9,600 shares authorized; 2,911 and

3,043 shares issued and outstanding, respectively) . . . . . . . . . . . . . . . . . . . . . . 29 30Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,129 24,587Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,649 13,332Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (243) (203)

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,564 37,746Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $76,138 $74,716

The accompanying notes are an integral part of these Consolidated Financial Statements.

86

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the fiscal years ended October 31

2004 2003 2002

In millions

Cash flows from operating activities:Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,497 $ 2,539 $ (903)Adjustments to reconcile net earnings (loss) to net cash provided by

operating activities:Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 2,395 2,527 2,119Provision for doubtful accounts—accounts and financing

receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 102 299Provision for inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367 391 280Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 800 1,780Acquisition-related charges, including in-process research and

development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 281 1,494Deferred taxes on earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 (279) (351)Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 141 234Changes in assets and liabilities:

Accounts and financing receivables . . . . . . . . . . . . . . . . . . . . . (696) 88 899Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,341) (638) 844Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2,257 395Taxes on earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32) 53 (357)Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (601) (1,240) (790)Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,078 (965) (499)

Net cash provided by operating activities . . . . . . . . . . . . . . . . 5,088 6,057 5,444

Cash flows from investing activities:Investment in property, plant and equipment . . . . . . . . . . . . . . . . . . (2,126) (1,995) (1,710)Proceeds from sale of property, plant and equipment . . . . . . . . . . . . 447 353 362Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (715) (596) (351)Maturities and sales of investments . . . . . . . . . . . . . . . . . . . . . . . . 1,064 875 381(Payments made) net cash acquired in connection with business

acquisitions, net of acquisition costs . . . . . . . . . . . . . . . . . . . . . . (1,124) (149) 3,557Dissolution of an equity investee . . . . . . . . . . . . . . . . . . . . . . . . . . — — 879

Net cash (used in) provided by investing activities . . . . . . . . . . (2,454) (1,512) 3,118

Cash flows from financing activities:Repayment of commercial paper and notes payable, net . . . . . . . . . . (172) (223) (2,402)Issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 749 2,529Payment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (285) (829) (472)Repurchase of zero-coupon subordinated convertible notes . . . . . . . . — — (127)Issuance of common stock under employee stock plans . . . . . . . . . . . 570 482 377Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,309) (751) (671)Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (972) (977) (801)

Net cash used in financing activities . . . . . . . . . . . . . . . . . . . (4,159) (1,549) (1,567)

(Decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . (1,525) 2,996 6,995Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . 14,188 11,192 4,197

Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . $12,663 $14,188 $11,192

The accompanying notes are an integral part of these Consolidated Financial Statements.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

AccumulatedCommon Stock Additional OtherNumber of Paid-in Retained Comprehensive

Shares Par Value Capital Earnings Income (Loss) Total

In millions, except number of shares in thousandsBalance October 31, 2001 . . . . . . . . . . . . . . . . 1,938,828 $19 $ 200 $13,693 $ 41 $13,953

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . (903) (903)Net unrealized loss on available-for-sale

securities . . . . . . . . . . . . . . . . . . . . . . (9) (9)Net unrealized loss on cash flow hedges . . . (61) (61)Minimum pension liability, net of taxes . . . (379) (379)Cumulative translation adjustment . . . . . . . 7 7

Comprehensive loss . . . . . . . . . . . . . . . . . . (1,345)

Issuance of common stock and optionsassumed in connection with businessacquisitions . . . . . . . . . . . . . . . . . . . . . . 1,114,673 11 24,706 24,717

Issuance of common stock in connection withemployee stock plans and other . . . . . . . . 29,855 388 388

Repurchases of common stock . . . . . . . . . . . (39,623) (655) (16) (671)Tax benefit from employee stock plans . . . . . 21 21Dividends . . . . . . . . . . . . . . . . . . . . . . . . . (801) (801)

Balance October 31, 2002 . . . . . . . . . . . . . . . . 3,043,733 30 24,660 11,973 (401) 36,262Net earnings . . . . . . . . . . . . . . . . . . . . . . . 2,539 2,539

Net unrealized gain on available-for-salesecurities . . . . . . . . . . . . . . . . . . . . . . 33 33

Net unrealized loss on cash flow hedges . . . (48) (48)Minimum pension liability, net of taxes . . . 211 211Cumulative translation adjustment . . . . . . . 2 2

Comprehensive income . . . . . . . . . . . . . . . . 2,737

Issuance of common stock in connection withemployee stock plans and other . . . . . . . . 38,808 451 451

Repurchases of common stock . . . . . . . . . . . (39,780) (548) (203) (751)Tax benefit from employee stock plans . . . . . 24 24Dividends . . . . . . . . . . . . . . . . . . . . . . . . . (977) (977)

Balance October 31, 2003 . . . . . . . . . . . . . . . . 3,042,761 30 24,587 13,332 (203) 37,746Net earnings . . . . . . . . . . . . . . . . . . . . . . . 3,497 3,497

Net unrealized loss on available-for-salesecurities . . . . . . . . . . . . . . . . . . . . . . (20) (20)

Net unrealized loss on cash flow hedges . . . (28) (28)Minimum pension liability, net of taxes . . . (13) (13)Cumulative translation adjustment . . . . . . . 21 21

Comprehensive income . . . . . . . . . . . . . . . . 3,457

Assumption of stock options in connectionwith business acquisitions . . . . . . . . . . . . . 15 15

Issuance of common stock in connection withemployee stock plans and other . . . . . . . . 40,467 592 592

Repurchases of common stock . . . . . . . . . . . (172,468) (1) (3,100) (208) (3,309)Tax benefit from employee stock plans . . . . . 35 35Dividends . . . . . . . . . . . . . . . . . . . . . . . . . (972) (972)

Balance October 31, 2004 . . . . . . . . . . . . . . . . 2,910,760 $29 $22,129 $15,649 $(243) $37,564

The accompanying notes are an integral part of these Consolidated Financial Statements.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1: Summary of Significant Accounting Policies

Principles of Consolidation

The Consolidated Financial Statements include the accounts of Hewlett-Packard Company, itswholly-owned subsidiaries and its controlled majority-owned subsidiaries (collectively, ‘‘HP’’). Equityinvestments in companies over which HP has the ability to exercise significant influence, but does nothold a controlling interest, are accounted for under the equity method, and HP’s proportionate shareof income or losses is recorded in Interest and other, net in the Consolidated Statements ofOperations. All significant intercompany accounts and transactions have been eliminated.

Reclassifications and Segment Reorganization

Certain reclassifications have been made to prior year amounts or balances in order to conform tothe current year presentation. The long-term portion of deferred revenue previously classified ascurrent deferred revenue has been reclassified to Other liabilities, and the prior year presentation alsohas been reclassified for comparative purposes. This reclassification did not impact HP’s consolidatednet revenue and also had no impact on HP’s Consolidated Statements of Operations, ConsolidatedStatements of Cash Flows or Consolidated Statements of Stockholders’ Equity for all periodspresented. As further described in Note 18, at the beginning of the first quarter of fiscal 2004 HP’sbusiness segments were realigned. Prior period segment operating results have been restated for allperiods presented to reflect the new organizational structure.

Use of Estimates

The preparation of financial statements in accordance with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affect the amounts reported inHP’s Consolidated Financial Statements and accompanying notes. Actual results could differ materiallyfrom those estimates.

Revenue Recognition

HP recognizes revenue when persuasive evidence of a sales arrangement exists, delivery occurs orservices are rendered, the sales price or fee is fixed or determinable and collectibility is reasonablyassured. When a sales arrangement contains multiple elements, such as hardware and softwareproducts, licenses and/or services, HP allocates revenue to each element based on its relative fair value.Fair value for software is determined based on vendor specific objective evidence (‘‘VSOE’’) or, in theabsence of VSOE for all the elements, the residual method when VSOE exists for all the undeliveredelements. The price charged when the software is sold separately determines VSOE. In the absence offair value for a delivered element, HP first allocates revenue to the fair value of the undeliveredelements and the residual revenue to the delivered elements. Where the fair value for an undeliveredelement cannot be determined, HP defers revenue for the delivered elements until the undeliveredelements are delivered. HP limits the amount of revenue recognition for delivered elements to theamount that is not contingent on the future delivery of products or services or subject to customer-specified return or refund privileges.

HP ceases revenue recognition on delinquent accounts based upon a number of factors, includingcustomer credit history, number of days past due and the terms of the customer agreement. HP

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 1: Summary of Significant Accounting Policies (Continued)

resumes revenue recognition and recognizes any associated deferred revenue when appropriatecustomer actions are taken to remove accounts from delinquent status.

Products

Under HP’s standard terms and conditions of sale, HP transfers title and risk of loss to thecustomer at the time product is delivered to the customer and revenue is recognized accordingly, unlesscustomer acceptance is uncertain or significant obligations remain. HP reduces revenue for estimatedcustomer returns, price protection, rebates and other offerings that occur under sales programsestablished by HP directly or with HP’s distributors and resellers. HP recognizes revenue allocated tosoftware licenses at the inception of the license. Revenue from the sale of equipment under sales-typeleases and direct-financing leases is recorded as product revenue at the inception of the lease. HPaccrues the estimated cost of post-sale obligations, including basic product warranties, based onhistorical experience at the time HP recognizes revenue.

Services

HP recognizes revenue from fixed-price support or maintenance contracts, including extendedwarranty contracts and software post-contract support contracts, ratably over the contract period andrecognizes the costs associated with these contracts as incurred. For time and material contracts, HPrecognizes revenue and costs as services are rendered. Revenue from fixed-price consultingarrangements is recognized over the contract period on a proportional performance basis, asdetermined by the relationship of actual costs incurred to date to the estimated total contract costs,with estimates regularly revised during the life of the contact. For outsourcing contracts, HP recognizesrevenue ratably over the contractual service period for fixed price contracts and on the output orconsumption basis for all other outsourcing contracts. HP recognizes costs associated with outsourcingcontracts as incurred, unless such costs relate to the transition phase of the outsourcing contract, inwhich case HP generally amortizes those costs over the contractual service period. Losses on consultingand outsourcing arrangements are recognized in the period that the contractual loss becomes probableand estimable. HP records amounts invoiced to customers in excess of revenue recognized as deferredrevenue until the revenue recognition criteria are met. HP records revenue that is earned andrecognized in excess of amounts invoiced on fixed-price contracts as trade receivables. HP recognizesrevenue from operating leases on an accrual basis as services revenue when the rental paymentsbecome due.

Financing Income

Financing income is produced by sales-type and direct-financing leases and is recognized on theaccrual basis under the effective interest method. Certain financing receivables for which HP recordedspecific reserves are placed on nonaccrual status. Nonaccrual assets are those receivables with specificreserves and other delinquent accounts for which it is likely that HP will be unable to collect allamounts due according to the terms of the customer agreement. Income recognition is discontinued onthese receivables. Financing receivables are removed from nonaccrual status when appropriate customeractions are taken to remove the accounts from delinquent status.

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Note 1: Summary of Significant Accounting Policies (Continued)

Shipping and Handling

Costs related to shipping and handling are included in cost of sales for all periods presented.

Advertising

Advertising costs are expensed as incurred or when the advertising is first run and totaledapproximately $1.8 billion in each of fiscal 2004 and 2003 and $1.4 billion in fiscal 2002.

Taxes on Earnings

HP recognizes deferred tax assets and liabilities for the expected tax consequences of temporarydifferences between the tax bases of assets and liabilities and their reported amounts using enacted taxrates in effect for the year the differences are expected to reverse. HP records a valuation allowance toreduce the deferred tax assets to the amount that is more likely than not to be realized.

Cash and Cash Equivalents

HP classifies investments as cash equivalents if the maturity of an investment is three months orless from the purchase date. Interest income was approximately $238 million in fiscal 2004, $240 millionin fiscal 2003 and $241 million in fiscal 2002.

Allowance for Doubtful Accounts

HP establishes an allowance for doubtful accounts to ensure trade and financing receivables arenot overstated due to uncollectibility. Bad debt reserves are maintained based on a variety of factors,including the length of time receivables are past due, trends in overall weighted average risk rating ofthe total portfolio, macroeconomic conditions, significant one-time events, historical experience and theuse of third-party credit risk models that generate quantitative measures of default probabilities basedon market factors and the financial condition of customers. A specific reserve for individual accounts isrecorded when HP becomes aware of a customer’s inability to meet its financial obligations, such as inthe case of bankruptcy filings or deterioration in the customer’s operating results or financial position.If circumstances related to customers change, estimates of the recoverability of receivables would befurther adjusted.

Inventory

Inventory is valued at the lower of cost or market, with cost computed on a first-in, first-out basis.

Property, Plant and Equipment

Property, plant and equipment is stated at cost less accumulated depreciation. Additions,improvements and major renewals are capitalized. Maintenance, repairs and minor renewals areexpensed as incurred. Depreciation is provided using straight-line or accelerated methods over theestimated useful lives of the assets. Estimated useful lives are 5 to 40 years for buildings andimprovements and 3 to 10 years for machinery and equipment. Leasehold improvements aredepreciated over the life of the lease or the asset, whichever is shorter. Equipment held for lease isdepreciated over the initial term of the lease to the equipment’s estimated residual value.

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Note 1: Summary of Significant Accounting Policies (Continued)

HP uses the straight-line method of depreciation for all property, plant and equipment placed intoservice after April 30, 2002. Property, plant and equipment placed into service prior to May 1, 2002 isdepreciated using accelerated methods for buildings, improvements and the majority of machinery andequipment. The effect of this change was not material to HP’s earnings or financial position for thefiscal year ended October 31, 2002.

Goodwill and Indefinite-Lived Purchased Intangible Assets

Statement of Financial Accounting Standards (‘‘SFAS’’) No. 142, ‘‘Goodwill and Other IntangibleAssets,’’ which was effective for HP for fiscal 2003, prohibits the amortization of goodwill andpurchased intangible assets with indefinite useful lives. HP reviews goodwill and purchased intangibleassets with indefinite lives for impairment annually at the beginning of its fourth fiscal quarter andwhenever events or changes in circumstances indicate the carrying value of an asset may not berecoverable in accordance with SFAS No. 142. HP performs a two-step impairment test. In the firststep, HP compares the fair value of each reporting unit to its carrying value. HP determines the fairvalue of its reporting units based on a weighting of income and market approaches. Under the incomeapproach, HP calculates the fair value of a reporting unit based on the present value of estimatedfuture cash flows. Under the market approach, HP estimates the fair value based on market multiplesof revenue or earnings for comparable companies. If the fair value of the reporting unit exceeds thecarrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing isperformed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair valueof the reporting unit, then HP must perform the second step impairment test in order to determine theimplied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwillexceeds its implied fair value, HP records an impairment loss equal to the difference. SFAS No. 142also requires that the fair value of the indefinite-lived purchased intangible assets be estimated andcompared to the carrying value. HP estimates the fair value of these intangible assets using an incomeapproach. HP recognizes an impairment loss when the estimated fair value of the indefinite-livedpurchased intangible assets is less than the carrying value.

Long-Lived Assets Including Finite-Lived Purchased Intangible Assets

Purchased intangible assets with finite lives are amortized using the straight-line method over theestimated economic lives of the assets, ranging from one to ten years.

Long-lived assets, such as property, plant and equipment and purchased intangible assets withfinite lives, are evaluated for impairment whenever events or changes in circumstances indicate thecarrying value of an asset may not be recoverable in accordance with SFAS No. 144, ‘‘Accounting forthe Impairment or Disposal of Long-Lived Assets.’’ HP assesses the fair value of the assets based onthe undiscounted future cash flow the assets are expected to generate and recognizes an impairmentloss when estimated undiscounted future cash flow expected to result from the use of the asset plus netproceeds expected from disposition of the asset, if any, are less than the carrying value of the asset.When an impairment is identified, HP reduces the carrying amount of the asset to its estimated fairvalue based on a discounted cash flow approach or, when available and appropriate, to comparablemarket values.

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Notes to Consolidated Financial Statements (Continued)

Note 1: Summary of Significant Accounting Policies (Continued)

Capitalized Software

HP capitalizes certain internal and external costs incurred to acquire or create internal usesoftware, principally related to software coding, designing system interfaces, and installation and testingof the software. Capitalized costs are amortized over the estimated useful lives of the software,generally from one to three years.

Derivative Financial Instruments

HP uses derivative financial instruments, including forwards, swaps, and options, to hedge certainforeign currency and interest rate exposures. Other derivatives not designated as hedges may also beused by HP, primarily forwards used to hedge foreign currency balance sheet exposures and warrants incompanies invested in as part of strategic relationships. HP does not use derivative financialinstruments for speculative purposes. See Note 8 for a full description of HP’s derivative financialinstrument activities and related accounting policies.

Investments

HP’s investments consist principally of time deposits, repurchase agreements, municipal securities,other debt securities and equity securities of publicly-held and privately-held companies. Investmentswith maturities of less than one year are classified as short-term investments.

HP’s investments in debt securities and its equity investments in public companies are classified asavailable-for-sale securities and carried at fair value. Fair values for investments in public companiesare determined using quoted market prices. The unrealized gains and losses on available-for-salesecurities, net of taxes, are recorded in accumulated other comprehensive loss.

Equity investments in privately-held companies are carried at the lower of cost or fair value. Fairvalues for investments in privately-held companies may be estimated based upon one or more of thefollowing: pricing models using historical and forecasted financial information and current market rates;liquidation values; the values of recent rounds of financing; and quoted market prices of comparablepublic companies.

Losses on Investments

HP monitors its investment portfolio for impairment on a periodic basis. In the event that thecarrying value of an investment exceeds its fair value and the decline in value is determined to beother-than-temporary, an impairment charge is recorded and a new cost basis for the investment isestablished. In order to determine whether a decline in value is other-than-temporary, HP evaluates,among other factors: the duration and extent to which the fair value has been less than the carryingvalue; the financial condition of and business outlook for the company, including key operational andcash flow metrics, current market conditions and future trends in the company’s industry; thecompany’s relative competitive position within the industry; and HP’s intent and ability to retain theinvestment for a period of time sufficient to allow for any anticipated recovery in fair value.

The declines in value of certain investments were determined to be other-than-temporary.Accordingly, HP recorded impairments of approximately $26 million in fiscal 2004, $72 million in fiscal2003 and $106 million in fiscal 2002. These impairments are included in Gains (losses) on investments

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Notes to Consolidated Financial Statements (Continued)

Note 1: Summary of Significant Accounting Policies (Continued)

and early extinguishment of debt in the Consolidated Statements of Operations. Depending on marketconditions, HP may record additional impairments on its investment portfolio in the future.

Concentrations of Credit Risk

Financial instruments that potentially subject HP to significant concentrations of credit risk consistprincipally of cash, investments, accounts receivable, financing receivables and derivatives.

HP maintains cash and cash equivalents, short and long-term investments, derivatives and certainother financial instruments with various financial institutions. These financial institutions are located inmany different geographical regions, and HP’s policy is designed to limit exposure with any oneinstitution. As part of its cash and risk management processes, HP performs periodic evaluations of therelative credit standing of the financial institutions. HP has not sustained material credit losses frominstruments held at financial institutions. HP utilizes forward contracts and other derivative contracts toprotect against the effects of foreign currency fluctuations. Such contracts involve the risk ofnon-performance by the counterparty, which could result in a material loss.

HP sells a significant portion of its products through third-party distributors and resellers and, as aresult, maintains individually significant receivable balances with these parties. If the financial conditionor operations of these distributors and resellers deteriorate substantially, HP’s operating results couldbe adversely affected. The ten largest distributor and reseller receivable balances collectively, whichwere concentrated primarily in North America, represented approximately 23% of gross accountsreceivable at October 31, 2004 and 21% at October 31, 2003. No single customer accounts for morethan 10% of accounts receivable. Credit risk with respect to other accounts receivable and financingreceivables is generally diversified due to the large number of entities comprising HP’s customer baseand their dispersion across many different industries and geographical regions. HP performs ongoingcredit evaluations of the financial condition of its third-party distributors, resellers and other customersand requires collateral, such as letters of credit and bank guarantees, in certain circumstances. HPgenerally has experienced longer accounts receivable collection cycles in its emerging markets, inparticular Asia Pacific and Latin America, when compared to its United States and European markets.In the event that accounts receivable collection cycles in the emerging markets significantly deteriorateor one or more of HP’s larger resellers in these regions fail, HP’s operating results could be adverselyaffected.

Stock-Based Compensation

HP applies the intrinsic-value-based method prescribed in Accounting Principles Board (‘‘APB’’)Opinion No. 25, ‘‘Accounting for Stock Issued to Employees,’’ in accounting for employee stock-basedcompensation. Accordingly, HP generally recognizes compensation expense only when it grants optionswith a discounted exercise price. HP recognizes any resulting compensation expense ratably over theassociated service period, which is generally the option vesting term.

HP has determined pro forma amounts as if the fair value method required by SFAS No. 123,‘‘Accounting for Stock-Based Compensation,’’ had been applied to its stock-based compensation. SeeNote 13 for descriptions of HP’s stock-based compensation plans. The fair value of stock options andstock purchase rights were estimated on the date of grant using the Black-Scholes option pricing model.

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Notes to Consolidated Financial Statements (Continued)

Note 1: Summary of Significant Accounting Policies (Continued)

The weighted average fair values and the assumptions used in calculating such values during each fiscalyear were as follows:

Stock Options Stock Purchase Rights

2004 2003 2002 2004 2003 2002

Weighted average fair value of grants . . . . . . . . . . . . . . $6.72 $5.15 $8.64 $4.95 $5.92 $5.81Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . 2.77% 3.23% 4.84% 1.11% 1.21% 1.94%Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4% 1.8% 1.8% 1.5% 1.9% 1.9%Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35% 35% 39% 28% 47% 54%Expected life in months . . . . . . . . . . . . . . . . . . . . . . . . 60 72 84 6 6 6

The pro forma effect on net earnings (loss) as if the fair value of stock-based compensation hadbeen recognized as compensation expense on a straight-line basis over the vesting period of the stockoption or purchase right was as follows for the fiscal years ended October 31:

2004 2003 2002

In millions, except per shareamounts

Net earnings (loss), as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,497 $2,539 $ (903)Add: Stock-based compensation included in reported net earnings (loss),

net of related tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 30 85Less: stock-based compensation expense determined under the fair-value

based method for all awards, net of related tax effects . . . . . . . . . . . . . . (751) (844) (860)

Pro forma net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,779 $1,725 $(1,678)

Basic net earnings (loss) per share:As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.16 $ 0.83 $ (0.36)

Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.92 $ 0.57 $ (0.67)

Diluted net earnings (loss) per share:As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.15 $ 0.83 $ (0.36)

Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.91 $ 0.56 $ (0.67)

Foreign Currency Transactions

HP uses the U.S. dollar predominately as its functional currency. Assets and liabilitiesdenominated in non-U.S. dollars are remeasured into U.S. dollars at end-of-period exchange rates,except for inventory, property, plant and equipment, other assets and deferred revenue, which areremeasured at historical exchange rates. Net revenue, cost of sales and expenses are remeasured ataverage exchange rates in effect during each period, except for those net revenue, cost of sales andexpenses related to the previously noted balance sheet amounts, which are remeasured at historicalexchange rates. Gains or losses from foreign currency remeasurement are included in net earnings(loss). Certain foreign subsidiaries designate the local currency as their functional currency and thetranslation of their assets and liabilities into U.S. dollars at the balance sheet dates are recorded as

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Note 1: Summary of Significant Accounting Policies (Continued)

translation adjustments and included as a component of accumulated other comprehensive income(loss).

Retirement and Post-Retirement Plans

HP has various defined benefit, defined contribution and other contributory and noncontributoryretirement and post-retirement plans. HP amortizes unrecognized actuarial gains and losses on astraight-line basis over the remaining estimated service life of participants. The measurement date forall plans is September 30 for fiscal 2004 and fiscal 2003. During fiscal 2002, the measurement dateswere October 31 for HP plans and September 30 for Compaq plans. See Note 15 for a full descriptionof these plans and the accounting and funding policies.

Recent Pronouncements

FASB Staff Position (‘‘FSP’’) No. 109-2, ‘‘Accounting and Disclosure Guidance for the ForeignEarnings Repatriation Provision within the American Jobs Creation Act of 2004’’ (‘‘FSP 109-2’’),provides guidance under FASB Statement No. 109, ‘‘Accounting for Income Taxes,’’ with respect torecording the potential impact of the repatriation provisions of the American Jobs Creation Act of2004 (the ‘‘Jobs Act’’) on enterprises’ income tax expense and deferred tax liability. The Jobs Act wasenacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financialreporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment orrepatriation of foreign earnings for purposes of applying FASB Statement No. 109. HP has not yetcompleted evaluating the impact of the repatriation provisions. Accordingly, as provided for in FSP109-2, HP has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisionsof the Jobs Act.

In May 2004, the FASB issued FSP No. 106-2 (‘‘FSP 106-2’’), ‘‘Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of2003’’ (the ‘‘Medicare Act’’). The Medicare Act was enacted December 8, 2003. FSP 106-2 supersedesFSP 106-1, ‘‘Accounting and Disclosure Requirements Related to the Medicare Prescription Drug,Improvement and Modernization Act of 2003,’’ and provides authoritative guidance on accounting forthe federal subsidy specified in the Medicare Act. The Medicare Act provides for a federal subsidyequal to 28% of certain prescription drug claims for sponsors of retiree health care plans with drugbenefits that are at least actuarially equivalent to those to be offered under Medicare Part D, beginningin 2006. HP has concluded that the prescription drug benefits provided under its plans are at leastactuarially equivalent to the prescription drug benefits offered under Medicare Part D.

FSP 106-2 provides that: (1) the effect of the federal subsidy should be accounted for as anactuarial experience gain; (2) since the federal subsidy is exempt from federal taxes, any plan-relatedtemporary income tax difference should exclude the effect of the subsidy; and (3) the effective date ofFSP 106-2 is the first interim or annual period beginning after June 15, 2004, with early adoptionencouraged.

In the third quarter of fiscal 2004, HP adopted FSP 106-2 retroactive to December 2003, the dateof the enactment of the Medicare Act. As the annual measurement date for HP’s U.S. postretirementbenefit plans is September 30, HP’s 2004 fiscal year expense is impacted by approximately 10 months.The expected subsidy reduced HP’s accumulated postretirement benefit obligation by approximately

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Note 1: Summary of Significant Accounting Policies (Continued)

$133 million, which HP recognized as a reduction in the unrecognized net actuarial loss. HP amortizesthe unrecognized net actuarial loss over the average remaining service life of HP’s employees eligiblefor postretirement benefits. The adoption of FSP 106-2 also affects service and interest costs associatedwith the plans and reduced the net periodic postretirement cost by approximately $10 million in fiscal2004. The expense amounts shown in Note 15 reflect the effects of the early adoption of FSP 106-2.HP may adjust these amounts in the future, as detailed regulations necessary to implement theMedicare Act have not been issued.

The adoption of the following recent accounting pronouncements did not have a material impacton HP’s results of operations and financial condition:

• FASB Interpretation No. 45 (‘‘FIN 45’’), ‘‘Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others—An Interpretation ofFASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34’’;

• FASB Interpretation No. 46(R) (‘‘FIN 46R’’), ‘‘Consolidation of Variable Interest Entities—AnInterpretation of ARB No. 51’’;

• FASB issued revised SFAS No. 132 (R) (revised 2003), ‘‘Employer’s Disclosures about Pensionsand Other Post-Retirement Benefits—An Amendment of FASB Statements No. 87, 88, and106’’;

• EITF Issue No. 03-1, ‘‘The Meaning of Other-Than-Temporary Impairment and Its Applicationto Certain Investments’’; and

• EITF Issue No. 03-5, ‘‘Applicability of AICPA Statement of Position 97-2 to Non-SoftwareDeliverables in an Arrangement Containing More-Than-Incidental Software.’’

In November 2004, the FASB issued SFAS No. 151, ‘‘Inventory Costs—An Amendment of ARBNo. 43, Chapter 4’’ (‘‘SFAS 151’’). SFAS 151 amends the guidance in ARB No. 43, Chapter 4,‘‘Inventory Pricing,’’ to clarify the accounting for abnormal amounts of idle facility expense, freight,handling costs, and wasted material (spoilage). Among other provisions, the new rule requires thatitems such as idle facility expense, excessive spoilage, double freight, and rehandling costs berecognized as current-period charges regardless of whether they meet the criterion of ‘‘so abnormal’’ asstated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed productionoverheads to the costs of conversion be based on the normal capacity of the production facilities.SFAS 151 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted byHP in the first quarter of fiscal 2006, beginning on November 1, 2005. HP is currently evaluating theeffect that the adoption of SFAS 151 will have on its consolidated results of operations and financialcondition but does not expect SFAS 151 to have a material impact.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS123R’’), which replaces SFAS No. 123, ‘‘Accounting for Stock-Based Compensation,’’ (‘‘SFAS 123’’) andsupercedes APB Opinion No. 25, ‘‘Accounting for Stock Issued to Employees.’’ SFAS 123R requires allshare-based payments to employees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair values beginning with the first interim or annual period afterJune 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted underSFAS 123 no longer will be an alternative to financial statement recognition. HP is required to adoptSFAS 123R in the fourth quarter of fiscal 2005, beginning August 1, 2005. Under SFAS 123R, HP must

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Note 1: Summary of Significant Accounting Policies (Continued)

determine the appropriate fair value model to be used for valuing share-based payments, theamortization method for compensation cost and the transition method to be used at date of adoption.The transition methods include prospective and retroactive adoption options. Under the retroactiveoption, prior periods may be restated either as of the beginning of the year of adoption or for allperiods presented. The prospective method requires that compensation expense be recorded for allunvested stock options and restricted stock at the beginning of the first quarter of adoption ofSFAS 123R, while the retroactive methods would record compensation expense for all unvested stockoptions and restricted stock beginning with the first period restated. HP is evaluating the requirementsof SFAS 123R and expects that the adoption of SFAS 123R will have a material impact on HP’sconsolidated results of operations and earnings per share. HP has not yet determined the method ofadoption or the effect of adopting SFAS 123R, and it has not determined whether the adoption willresult in amounts that are similar to the current pro forma disclosures under SFAS 123.

In December 2004, the FASB issued SFAS No. 153, ‘‘Exchanges of Nonmonetary Assets—AnAmendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions’’ (‘‘SFAS 153’’).SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similarproductive assets in paragraph 21(b) of APB Opinion No. 29, ‘‘Accounting for NonmonetaryTransactions,’’ and replaces it with an exception for exchanges that do not have commercial substance.SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows ofthe entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for thefiscal periods beginning after June 15, 2005 and is required to be adopted by HP in the first quarter offiscal 2006, beginning on November 1, 2005. HP is currently evaluating the effect that the adoption ofSFAS 153 will have on its consolidated results of operations and financial condition but does not expectit to have a material impact.

Note 2: Net Earnings (Loss) Per Share (‘‘EPS’’)

HP’s basic EPS is calculated using net earnings (loss) and the weighted-average number of sharesoutstanding during the reporting period. Diluted EPS includes the effect from potential issuance ofcommon stock, such as stock issuable pursuant to the exercise of stock options and the assumedconversion of convertible notes.

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Note 2: Net Earnings (Loss) Per Share (‘‘EPS’’) (Continued)

The reconciliation of the numerators and denominators of the basic and diluted EPS calculationswas as follows for the fiscal years ended October 31:

2004 2003 2002

In millions, except per shareamounts

Numerator:Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,497 $2,539 $ (903)Adjustment for interest expense on zero-coupon subordinated convertible

notes, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 — —

Net earnings (loss), adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,505 $2,539 $ (903)

Denominator:Weighted-average shares used to compute basic EPS . . . . . . . . . . . . . . . . 3,024 3,047 2,499Effect of dilutive securities:

Dilution from employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 16 —Zero-coupon subordinated convertible notes . . . . . . . . . . . . . . . . . . . . . 8 — —

Dilutive potential common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 16 —

Weighted-average shares used to compute diluted EPS . . . . . . . . . . . . . . . 3,055 3,063 2,499

Net earnings (loss) per share:Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.16 $ 0.83 $(0.36)Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.15 $ 0.83 $(0.36)

In fiscal 2004, 2003 and 2002, options to purchase approximately 408 million, 362 million and459 million, respectively, of HP stock were excluded from the calculation of diluted EPS because theeffect was antidilutive. Stock options are antidilutive when the exercise price of the options is greaterthan the average market price of the common shares for the period or when the results fromoperations are a net loss. In addition, the assumed conversion of zero-coupon subordinated notes intoapproximately 8 million shares of HP stock was excluded from the calculation of diluted EPS in fiscal2003 and 2002 because the effect was antidilutive.

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Note 3: Balance Sheet Details

Balance sheet details were as follows at October 31:

Accounts and Financing Receivables

2004 2003

In millions

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,512 $9,268Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (286) (347)

$10,226 $8,921

Financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,066 $3,145Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (121) (119)

$ 2,945 $3,026

HP entered into a six-year revolving agreement during the third quarter of fiscal 2004 to sellcertain trade receivables without recourse. Sold receivables are collected by the third party, with thesales of receivables limited only by the outstanding maximum balance of receivables not yet collectedby the third party. Trade receivables of approximately 680 million euros were sold during the last halfof fiscal 2004, primarily during the fourth quarter. The implementation of this program did not have amaterial impact on HP’s outstanding receivable balance as utilization of this program was limited tocertain customer receivables that were already under an alternative prompt payment program. Feesassociated with this program do not differ materially from the cash discounts offered to thesecustomers under the alternative prompt payment program.

Inventory

2004 2003

In millions

Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,322 $4,653Purchased parts and fabricated assemblies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,749 1,412

$7,071 $6,065

Other Current Assets

2004 2003

In millions

Deferred tax assets—short term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,744 $2,938Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,839 4,206Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,102 1,207

$9,685 $8,351

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Notes to Consolidated Financial Statements (Continued)

Note 3: Balance Sheet Details (Continued)

Property, Plant and Equipment

2004 2003

In millions

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 657 $ 810Buildings and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,752 4,959Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,427 7,530

13,836 13,299Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,187) (6,817)

$ 6,649 $ 6,482

Depreciation expense was approximately $1.8 billion in fiscal 2004, $2.0 billion in fiscal 2003 and$1.7 billion in fiscal 2002.

Long-Term Financing Receivables and Other Assets

2004 2003

In millions

Financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,168 $2,745Deferred tax assets—long term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,111 2,859Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,378 2,426

$6,657 $8,030

Other Accrued Liabilities

2004 2003

In millions

Other accrued taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,157 $1,756Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,494 1,413Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,981 5,376

$9,632 $8,545

Other Liabilities

2004 2003

In millions

Pension, post-retirement, and post-employment liabilities . . . . . . . . . . . . . . . . . . . . . $2,620 $2,596Long-term deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,390 1,169Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,353 1,242

$5,363 $5,007

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Notes to Consolidated Financial Statements (Continued)

Note 4: Supplemental Cash Flow Information

Supplemental cash flow information was as follows for the fiscal years ended October 31:

2004 2003 2002

In millions

Cash paid for income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 609 $ 464 $ 139Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 305 $ 394 $ 206Non-cash investing and financing activities:

Net issuances of restricted stock and other employee stock benefits . . . $ 68 $ 3 $ 11Issuance of common stock and options assumed in business

acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15 $ — $24,717

Note 5: Acquisitions

Acquisitions have been recorded using the purchase method of accounting, and, accordingly, theresults of operations are included in HP’s consolidated results as of the date of each acquisition. HPallocates the purchase price of its acquisitions to the tangible assets, liabilities and intangible assetsacquired, including in-process research and development (‘‘IPR&D’’), based on their estimated fairvalues. The excess purchase price over those fair values is recorded as goodwill. The fair value assignedto assets acquired is based on valuations using management’s estimates and assumptions. The goodwillrecorded as a result of these acquisitions is not expected to be deductible for tax purposes.

Compaq

On May 3, 2002, HP acquired all of the outstanding stock of Compaq Computer Corporation(‘‘Compaq’’), a leading global provider of information technology products, services and solutions, inexchange for 0.6325 shares of HP common stock for each outstanding share of Compaq common stockand the assumption of options to purchase Compaq common stock based on the same ratio. Inaddition, HP assumed certain Compaq stock plans. The acquisition of Compaq has enhanced HP’scompetitive position in key industries, while strengthening its sales force and relationships with strategiccustomer bases. The acquisition has enabled HP to focus on strategic product and customer bases,achieve significant cost synergies and economies of scale and improve the results of its EnterpriseStorage and Servers (‘‘ESS’’) and Software businesses (formerly combined as the Enterprise SystemsGroup), Personal Systems Group (‘‘PSG’’) and HP Services (‘‘HPS’’) businesses. Furthermore, thesecost savings offer strategic benefits by reducing HP’s cost structure in competitive businesses such aspersonal computers (‘‘PCs’’). The acquisition also has allowed the Imaging and Printing Group (‘‘IPG’’)to leverage the interrelationship between PC and printer sales and utilize Compaq’s direct distributioncapabilities. HP derived the exchange ratio in the acquisition from estimates of future revenue andearnings of the combined company assuming completion of the acquisition, and from measuring therelative contributions of each of HP and Compaq to achieving these forecasted results, in addition tomeasuring the relative ownership of the combined company implied by their contributions. Thistransaction resulted in the issuance of approximately 1.1 billion shares of HP common stock with a fairvalue of approximately $22.7 billion, the assumption of Compaq options to purchase approximately200 million shares of HP common stock with a Black-Scholes fair value of approximately $1.4 billionand estimated direct transaction costs of $79 million, for a total purchase price of $24.2 billion. The fairvalue of HP common stock was derived using an average market price per share of HP common stockof $20.92, which was based on an average of the closing prices for a range of trading days aroundSeptember 3, 2001, the announcement date of the acquisition.

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Notes to Consolidated Financial Statements (Continued)

Note 5: Acquisitions (Continued)

Of the total purchase price for this acquisition, $14.5 billion was allocated to goodwill, $3.5 billionwas allocated to amortizable purchased intangible assets and $1.4 billion was allocated to intangibleassets with an indefinite life. The purchase price also included $18.4 billion of additional assets and$14.3 billion of assumed liabilities. HP is amortizing the purchased intangibles on a straight-line basisover weighted average estimated useful lives of approximately 9 years for customer contracts andapproximately 6 years for developed and core technology and patents. The intangible asset with anindefinite life is the Compaq trade name. This intangible asset will not be amortized because it has anindefinite remaining useful life based on many factors and considerations, including the length of timethat the Compaq name has been in use, the Compaq brand awareness and market position and theplans for continued use of the Compaq brand within a portion of HP’s overall product portfolio.

Of the total purchase price, $735 million was allocated to IPR&D and was expensed in the thirdquarter of fiscal 2002. Projects that qualify as IPR&D represent those that have not yet reachedtechnological feasibility and for which no future alternative uses exist. Technological feasibility isdefined as being equivalent to a beta-phase working prototype in which there is no remaining riskrelating to the development.

The value assigned to IPR&D was determined by considering the importance of each project tothe overall development plan, estimating costs to develop the purchased IPR&D into commerciallyviable products, estimating the resulting net cash flows from the projects when completed anddiscounting the net cash flows to their present value. The revenue estimates used to value thepurchased IPR&D were based on estimates of the relevant market sizes and growth factors, expectedtrends in technology and the nature and expected timing of new product introductions by Compaq andits competitors.

The rates utilized to discount the net cash flows to their present values were based on Compaq’sweighted average cost of capital. The weighted average cost of capital was adjusted to reflect thedifficulties and uncertainties in completing each project and thereby achieving technological feasibility,the percentage-of-completion of each project, anticipated market acceptance and penetration, marketgrowth rates and risks related to the impact of potential changes in future target markets. Based onthese factors, discount rates that range from 25% - 42% were deemed appropriate for valuing theIPR&D.

In accordance with the terms of Compaq’s equity-based plans, all of Compaq’s outstanding optionsthat were granted prior to September 1, 2001 vested upon Compaq stockholder approval of theacquisition. The intrinsic value of unvested Compaq options of approximately $70 million as of May 3,2002, which relates to options granted subsequent to August 31, 2001, was allocated to deferredcompensation in the purchase price allocation. HP amortizes the deferred compensation over theremaining vesting period of the options, which was approximately 3.5 years at May 3, 2002.

Pro forma results

The following unaudited pro forma financial information presents the combined results ofoperations of HP and Compaq as if the acquisition had occurred as of the beginning of the periodpresented. Due to different historical fiscal period ends for HP and Compaq, the results for the yearended October 31, 2002 combine the historical results of HP for the year ended October 31, 2002 andthe historical quarterly results of Compaq for the six months ended March 31, 2002 and for the periodfrom May 3, 2002 (the acquisition date) to October 31, 2002. An adjustment of $162 million was made

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Notes to Consolidated Financial Statements (Continued)

Note 5: Acquisitions (Continued)

to the combined results of operations, reflecting amortization of purchased intangible assets, net of tax,that would have been recorded if the acquisition had occurred at the beginning of the periodpresented. The unaudited pro forma financial information is not intended to represent or be indicativeof the consolidated results of operations or financial condition of HP that would have been reportedhad the acquisition been completed as of the beginning of the period presented, and should not betaken as representative of the future consolidated results of operations or financial condition of HP.Pro forma results were as follows for the fiscal year ended October 31, 2002:

In millions, exceptper shareamounts

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $72,346Cost of sales(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,311Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,035Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,953Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,091Amortization of purchased intangible assets and goodwill . . . . . . . . . . . . . . . 664Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,780Acquisition-related charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 772In-process research and development charges . . . . . . . . . . . . . . . . . . . . . . . 793Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,018)Interest and other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Losses on investments and early extinguishment of debt . . . . . . . . . . . . . . . . (70)Dispute settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Loss before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,054)Benefit from taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (126)Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (928)

Net loss per share:Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.31)

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.31)

(1) Cost of products, cost of services and financing interest.

Synstar

In October 2004, HP acquired approximately 99.7% of the outstanding stock of UK-based Synstarplc (‘‘Synstar’’). The purchase price was approximately $343 million, which included $298 million ofcash paid as well as direct transaction costs and certain liabilities recorded in connection with thetransaction. Synstar is a leading independent provider of information technology (‘‘IT’’) services acrossEurope. This acquisition is intended to strengthen further HP’s offering primarily in the area of multi-technology support services. HP recorded approximately $172 million of goodwill and $122 million ofamortizable purchased intangible assets in connection with this acquisition. HP is amortizing thepurchased intangibles, principally customer contracts and relationships, on a straight-line basis overtheir estimated useful lives ranging from three to seven years.

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Notes to Consolidated Financial Statements (Continued)

Note 5: Acquisitions (Continued)

Triaton

In April 2004, HP acquired all of the outstanding stock of Triaton GmbH (with subsidiaries inSingapore, China and Brazil), Triaton France SAS and Triaton N.A, Inc. (USA) (collectively ‘‘Triaton’’).The purchase price was approximately $464 million, which included $306 million of cash paid as well asdirect transaction costs and certain liabilities recorded in connection with the transaction. Triaton is oneof Germany’s largest independent IT service providers. This acquisition is intended to increase HP’scapacity to deliver its Adaptive Enterprise offerings, with customers benefiting from added managedservices, technology services (formerly called customer support) and consulting and integrationcapabilities. HP recorded approximately $285 million of goodwill and $179 million of amortizablepurchased intangible assets in connection with this acquisition. HP is amortizing the purchasedintangibles, principally customer contracts and relationships, on a straight-line basis over their estimateduseful lives ranging from two to eight years.

Digital GlobalSoft Limited

In fiscal 2004, HP paid approximately $315 million in cash for additional shares of DigitalGlobalSoft Limited, a consolidated subsidiary of HP (‘‘DGS’’), to increase HP’s ownership from 50.1%to approximately 97.2%. DGS is a globally-focused software development and IT services company.This subsidiary has enhanced HP’s capability in IT services, including expertise in life cycle servicessuch as migration, technical and application services. HP recorded approximately $281 million ofgoodwill in connection with this acquisition.

Intria-HP

In November 2002, HP acquired the remaining outstanding stock of Intria Corporation (‘‘Intria’’),in which HP held a 49% equity interest at October 31, 2002, and other related IT assets from CanadianImperial Bank of Commerce (‘‘CIBC’’), for approximately $100 million in cash. Intria is a provider ofmanaged services, which HP jointly owned with CIBC. In connection with the acquisition, HP alsoentered into a multi-year contract to provide managed services to CIBC. This acquisition and theoutsourcing relationship with CIBC have added depth and capability to HPS, including expertise inmanaging complex, heterogeneous IT operating environments for customers in the financial servicesindustry and others that demand high availability computing solutions. HP recorded approximately$27 million of goodwill and $33 million of amortizable purchased intangible assets in connection withthe acquisition. HP is amortizing the purchased intangible assets, consisting mainly of customercontracts, over their estimated weighted-average useful lives ranging from three to ten years.

Indigo

In March 2002, HP acquired substantially all of the outstanding stock of Indigo N.V. (‘‘Indigo’’),not previously owned by HP in exchange for HP common stock and non-transferable contingent valuerights (‘‘CVRs’’) and the assumption of options to purchase Indigo common stock. This acquisition hasstrengthened HP’s printer offerings by adding high performance digital color printing systems. The totalpurchase price for Indigo was approximately $719 million, which included the fair value of HP commonstock issued and options assumed to purchase HP stock, as well as direct transaction costs and the costof an equity investment made by HP in Indigo in October 2000. HP issued approximately 32 millionshares of HP common stock, and a consolidated subsidiary of HP issued approximately 53 million

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Notes to Consolidated Financial Statements (Continued)

Note 5: Acquisitions (Continued)

CVRs, which HP guaranteed, in connection with this transaction. HP recorded approximately$499 million of goodwill and $153 million of amortizable purchased intangible assets in conjunctionwith the acquisition and the previous equity investment. HP is amortizing the purchased intangibleassets over their estimated useful lives ranging from five to eight years. In addition, HP recorded apre-tax charge of approximately $58 million for IPR&D at the completion of the acquisition becausetechnological feasibility had not been established and no future alternative uses existed.

The CVRs issued in conjunction with this acquisition entitle each holder to a one-time contingentcash payment of up to $4.50 per CVR, based on the achievement of certain cumulative revenue resultsover a three-year period. Any liability related to the CVRs will be recorded as additional goodwill aspayout thresholds are achieved. The future cash pay-out, if any, of the CVRs will be payable after athree-year period that began on April 1, 2002 and could result in a maximum obligation of$237 million. HP has not incurred a liability associated with the CVRs as of October 31, 2004.

Liquidity Management Corporation

At October 31, 2001, HP held a 49.5% equity interest in Liquidity Management Corporation(‘‘LMC’’), a non-strategic investment company, which HP accounted for under the equity method ofaccounting. A third party investor held the remaining 50.5% of equity interest. On November 1, 2001,LMC redeemed the outstanding equity of the third party investor, leaving HP as the sole stockholderof LMC. Accordingly, effective November 1, 2001, HP has included the assets, liabilities and results ofoperations of LMC in its Consolidated Financial Statements. At November 1, 2001, the assets of LMCconsisted primarily of $879 million of cash and cash equivalents.

Other Acquisitions

HP also acquired other companies during fiscal 2004 and 2003 that were not significant to itsfinancial position or results of operations. Total consideration for these acquisitions was approximately$250 million and $85 million in fiscal 2004 and 2003, respectively. HP recorded approximately$181 million of goodwill and $49 million of purchased intangibles in fiscal 2004 and $64 million ofgoodwill and $20 million of purchased intangibles in fiscal 2003 in connection with these otheracquisitions. HP also recorded approximately $37 million and $1 million of IPR&D related to theseacquisitions in fiscal 2004 and 2003, respectively.

HP has included the results of operations of all acquisitions prospectively from the respective datesof the transactions. Except for the Compaq acquisition, HP has not presented the pro forma results ofoperations of the acquired businesses because the results are not material to HP’s consolidated resultsof operations individually or in the aggregate.

Acquisition-Related Charges

Acquisition-related charges of approximately $54 million in fiscal 2004 consisted of deferredcompensation, merger-related inventory adjustments and professional fees, while the charges ofapproximately $280 million in fiscal 2003 and $701 million in fiscal 2002 were attributable primarily tocosts incurred for employee retention bonuses in connection with the Compaq acquisition as well asprofessional fees and consulting services. In addition, acquisition-related charges in fiscal 2002 includedcosts incurred for proxy solicitation and advertising related to the Compaq acquisition.

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Notes to Consolidated Financial Statements (Continued)

Note 6: Goodwill and Purchased Intangible Assets

Goodwill

Goodwill allocated to HP’s business segments as of October 31, 2003 and changes in the carryingamount of goodwill for the fiscal year ended October 31, 2004 are as follows:

Enterprise ImagingStorage Enterprise Personal and HP

HP and Systems Systems Printing FinancialServices Servers Software Group Group Group Services Total

In millions

Balance at October 31, 2003 . . . . $5,522 $ — $ — $ 5,390 $2,324 $1,508 $150 $14,894Reallocation . . . . . . . . . . . . . . . . — 4,794 596 (5,390) — — — —Goodwill acquired during the

period . . . . . . . . . . . . . . . . . . . 740 11 168 — — — — 919Goodwill adjustment . . . . . . . . . . 8 5 (5) — 3 2 2 15

Balance at October 31, 2004 . . . . $6,270 $4,810 $759 $ — $2,327 $1,510 $152 $15,828

The goodwill reallocation shown in the table above relates to the reorganization of HP’s businesssegments discussed in Note 18. The goodwill formerly included in the Enterprise Systems Group wasallocated between ESS and Software based on a relative fair value approach.

The goodwill adjustment shown in the table above relates primarily to revisions of acquisition-related tax estimates, that resulted in additions to goodwill, offset partially by the reduction of arestructuring liability and asset impairments associated with the fiscal 2002 and 2001 pre-acquisitionCompaq restructuring plans. The reduction of the restructuring liability and asset impairments adjustedoriginal estimates to actual costs incurred at various locations throughout the world.

On November 1, 2002, HP adopted SFAS No. 142, which requires that goodwill no longer beamortized and instead be tested for impairment on a periodic basis.

Based on the results of its annual impairment tests, HP determined that no impairment ofgoodwill existed as of August 1, 2004 or August 1, 2003. However, future goodwill impairment testscould result in a charge to earnings. HP will continue to evaluate goodwill on an annual basis as of thebeginning of its fourth fiscal quarter, and whenever events and changes in circumstances indicate thatthere may be a potential impairment.

If the provisions of SFAS No. 142 had been in effect for all periods presented, HP’s net earnings(loss) and net earnings (loss) per share would have been unchanged for fiscal 2004 and 2003. For fiscal2002, the net loss, basic net loss per share and diluted net loss per share would have been $796 million,$0.32 and $0.32, respectively, which represents an improvement on reported net loss, basic net loss pershare and diluted net loss per share of $107 million, $0.04 and $0.04, respectively.

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Notes to Consolidated Financial Statements (Continued)

Note 6: Goodwill and Purchased Intangible Assets (Continued)

Purchased Intangible Assets

HP’s purchased intangible assets associated with completed acquisitions at October 31 arecomposed of:

2004 2003

Accumulated AccumulatedGross Amortization Net Gross Amortization Net

In millions

Customer contracts, customer lists anddistribution agreements . . . . . . . . . . . . $2,340 $ (637) $1,703 $2,040 $(371) $1,669

Developed and core technology andpatents . . . . . . . . . . . . . . . . . . . . . . . 1,704 (775) 929 1,663 (457) 1,206

Product trademarks . . . . . . . . . . . . . . . . 93 (44) 49 84 (25) 59

Total amortizable purchased intangibleassets . . . . . . . . . . . . . . . . . . . . . . . . . 4,137 (1,456) 2,681 3,787 (853) 2,934

Compaq trade name . . . . . . . . . . . . . . . 1,422 — 1,422 1,422 — 1,422

Total purchased intangible assets . . . . . . $5,559 $(1,456) $4,103 $5,209 $(853) $4,356

Amortization expense related to finite-lived purchased intangible assets was approximately$603 million in fiscal 2004, $563 million in fiscal 2003 and $295 million in fiscal 2002.

HP performs an annual impairment test for its purchased intangible asset with an indefinite life,the Compaq trade name. Based on the results of its annual impairment tests, HP determined that noimpairment of the Compaq trade name existed as of August 1, 2004 or August 1, 2003. However, futureimpairment tests could result in a charge to earnings. HP will continue to evaluate the purchasedintangible asset with an indefinite life on an annual basis as of the beginning of the fourth quarter, andwhenever events and changes in circumstances indicate that there may be a potential impairment.

The finite-lived purchased intangible assets consist of customer contracts, customer lists anddistribution agreements, which have weighted average useful lives of approximately eight years, anddeveloped and core technology, patents and product trademarks, which have weighted average usefullives of approximately six years.

Estimated future amortization expense related to finite-lived purchased intangible assets atOctober 31, 2004 is as follows:

Fiscal year: In millions

2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5742006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5302007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4622008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3962009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 398

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,681

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Notes to Consolidated Financial Statements (Continued)

Note 7: Restructuring Charges

Fiscal 2003 Restructuring Plans

In the second, third and fourth quarters of fiscal 2003, HP’s management approved andimplemented plans to restructure certain of its operations. These plans were entered into with theintent of better managing HP’s cost structure and aligning certain of its operations more effectivelywith current businesses conditions. The initial charge for these actions totaled $752 million andincluded costs of $639 million relating to severance and other employee benefits for workforcereductions, costs of $42 million for vacating duplicative facilities (leased or owned) and contracttermination costs, as well as asset impairments of $71 million associated with the identification ofduplicative assets and facilities (leased or owned) relating to the acquisition of Compaq. During fiscal2004, HP recorded $37 million of additional charges under the 2003 restructuring plans whichrepresented changes in original estimates as well as new charges that did not meet the recognitioncriteria during fiscal 2003 and accordingly were charged to expense as incurred in fiscal 2004. Certainadjustments to the original estimates for each operating segment were reflected in the total of costsincurred and expected. The adjustments had the effect of decreasing the estimated costs to be incurredfor the PSG segment by approximately $48 million and increasing the estimated costs to be incurred forthe remaining segments by approximately $54 million.

Original estimates of 2,300, 4,700 and 2,000 employees across many regions and job classes wereincluded in the second third and fourth quarter workforce reduction plans, respectively, for a total of9,000 employees. As of October 31, 2004, approximately 8,300 of these employees had been terminated,placed in the workforce reduction programs or had retired. They consisted of substantially all of theemployees included in the second and third quarter actions and a majority of the employees in thefourth quarter action. An additional 300 employees under the fourth quarter action are expected toleave during fiscal 2005, bringing the total estimated number of employees affected under the 2003plans to 8,600, a reduction of 400 employees from the original estimate. HP expects to pay out themajority of the remaining costs relating to severance and other employee benefits in connection withthe remainder of the fourth quarter action during fiscal 2005. Some minor remaining severance andother employee benefits are expected to be paid out under phased retirement plans required in certaininternational locations by the end of fiscal 2010. HP anticipates the remaining costs of vacatingduplicative facilities and contract terminations associated with the second and fourth quarter actions tobe substantially settled by the end of fiscal 2005. In addition, approximately $6 million of costs relatedto the 2003 plans have not yet been accrued and will be charged to operations as the restructuringactivities occur during fiscal 2005.

Fiscal 2002 Restructuring Plans

In fiscal 2002, HP’s management initiated and approved plans to restructure the operations of boththe pre-acquisition HP and pre-acquisition Compaq organizations. Consequently, HP recordedapproximately $1.8 billion of costs associated with exiting the activities of pre-acquisition HP such asseverance, early retirement and other employee benefits, costs of vacating duplicative facilities (leasedor owned), contract termination costs, asset impairment charges and other costs associated with exitingactivities of HP. These costs were included as a charge to the results of operations for the fiscal yearended October 31, 2002. In addition, HP recorded approximately $960 million of similar charges inconnection with restructuring the pre-acquisition Compaq organization. HP recognized these costs as aliability assumed in the purchase and were included in the allocation of the cost to acquire Compaq. Infiscal 2004 and 2003, HP recorded $75 million and $48 million, respectively of additional costs, net of

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Notes to Consolidated Financial Statements (Continued)

Note 7: Restructuring Charges (Continued)

reductions, in estimated severance and other employee benefits, as well as asset impairment and otherrestructuring costs related to the fiscal 2002 restructuring plans. Additionally, in fiscal 2004 and 2003,HP recorded adjustments to reduce goodwill of $71 million and $94 million, respectively. Theseadjustments related to true-ups to the fiscal pre-merger Compaq 2002 restructuring plan. These fiscal2004 and 2003 adjustments included changes to asset impairments for buildings vacated as part of theacquisition and adjustments to restructuring liabilities for changes in severance estimates and contracttermination costs.

The severance, early retirement costs and other employee benefits related to the termination orplanned early retirement of an originally estimated 17,900 employees worldwide across many regions,business functions and job classes. As of October 31, 2004, approximately 17,600 employees included inthe workforce reduction program had been terminated or had retired, a reduction of 300 employeesfrom the original estimate. HP expects to pay the majority of the remaining balance of the severancecosts by the end of fiscal 2005. HP anticipates paying the remaining balance of the costs for the otherrelated restructuring activities, which consist primarily of contractual obligations such as facility leases,over the lives of the related obligations, which extend to the end of fiscal 2010.

Fiscal 2001 Restructuring Plans

In fiscal 2001, HP’s management approved restructuring actions to respond to the global economicdownturn and to improve HP’s cost structure by streamlining operations and prioritizing resources instrategic areas of HP’s business infrastructure. HP recorded a restructuring charge of $384 million infiscal 2001 to reflect these actions which consisted primarily of severance and other employee benefitsrelated to termination of 7,500 employees worldwide. During fiscal 2002, HP recorded $21 million ofadditional charges to reflect adjustments to the expected severance cost of its fiscal 2001 plan. As ofthe end of fiscal 2003, HP had terminated substantially all of these employees were terminated andpaid substantially all accrued costs.

As part of the acquisition of Compaq, HP assumed the remaining obligations of Compaq’s existingrestructuring plans of $259 million, which Compaq initially recorded in its 2001 fiscal year. In fiscal2004 and 2003, HP recorded adjustments to decrease goodwill related to true-ups to these plans of$2 million and $26 million, respectively. The remaining balance of the pre-merger Compaq fiscal 2001plan consists primarily of severance and other employee benefits as well as other restructuring costs.HP expects to settle the majority of the remaining balance of the severance accrual under phasedretirement plans required in certain international locations by the end of fiscal 2009. HP anticipatespaying the other related restructuring activities, which consist primarily of contractual obligations suchas facility leases, over the lives of the related obligations, which extend to the end of fiscal 2010.

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Notes to Consolidated Financial Statements (Continued)

Note 7: Restructuring Charges (Continued)

Summary of Restructuring Plans

The activity in the accrued restructuring balances related to all of the plans described above was asfollows for fiscal 2004:

Non-cash As of October 31, 2004settle-Fiscal ments and Fiscal Fiscal Total Total

Balance, year 2004 Goodwill other Balance, year 2003 year 2002 costs and expectedOctober 31, charges adjust- Cash adjust- October 31, costs and costs and adjustments costs and

2003 (reversals) ments payments ments 2004 adjustments adjustments to date adjustments

In millionsFiscal 2003 plans:

Employee severance and other benefitscharges (by segment and other):

Enterprise Storage and Servers . . . . $ 13 $ 140 $ 153 $ 153Software . . . . . . . . . . . . . . . . . . — 13 13 13Personal Systems Group . . . . . . . . (48) 99 51 51HP Services . . . . . . . . . . . . . . . . 21 328 349 349Infrastructure . . . . . . . . . . . . . . . 20 59 79 79

Employee severance and other benefits . . $239 $ 6 $ — $(191) $ 3 $ 57 $ 639 $ 645 $ 645Infrastructure—asset impairments . . . . . — 6 — — (6) — 71 77 77Infrastructure—other related restructuring

activities . . . . . . . . . . . . . . . . . . . 37 25 — (41) — 21 42 67 73

Total . . . . . . . . . . . . . . . . . . . . . . . $276 $ 37 $ — $(232) $(3) $ 78 $ 752 $ 789 $ 795

Fiscal 2002 pre-merger HP plan:Employee severance and other benefits . . $127 $ 21 $ — $(143) $ 2 $ 7 $ 32 $1,029 $1,082 $1,082Asset impairments . . . . . . . . . . . . . . . — — — — — — 65 546 611 611Other related restructuring activities . . . . 45 5 — (34) — 16 (49) 184 140 140

Total . . . . . . . . . . . . . . . . . . . . . . . $172 $ 26 $ — $(177) $ 2 $ 23 $ 48 $1,759 $1,833 $1,833

Fiscal 2002 pre-merger Compaq plan:Employee severance and other benefits . . $ 73 $ 17 $ — $ (83) $— $ 7 $ (36) $ 651 $ 632 $ 632Asset impairments . . . . . . . . . . . . . . . — — (42) — 42 — (3) — (45) (45)Other related restructuring activities . . . . 175 32 (29) (87) — 91 (55) 309 257 257

Total . . . . . . . . . . . . . . . . . . . . . . . $248 $ 49 $ (71) $(170) $42 $ 98 $ (94) $ 960 $ 844 $ 844

Fiscal 2001 pre-merger HP plan:Employee severance and other benefits . . $ 2 $ — $ — $ (2) $— $ — $ — $ 21 $ 393 $ 393Other related restructuring activities . . . . 1 2 — — — 3 — — 14 14

Total . . . . . . . . . . . . . . . . . . . . . . . $ 3 $ 2 $ — $ (2) $— $ 3 $ — $ 21 $ 407 $ 407

Fiscal 2001 pre-merger Compaq plan:Employee severance and other benefits . . $ 24 $ — $ — $ (5) $— $ 19 $ (32) $ 117 $ 85 $ 85Other related restructuring activities . . . . 84 — (2) (15) — 67 6 142 146 146

Total . . . . . . . . . . . . . . . . . . . . . . . $108 $ — $ (2) $ (20) $— $ 86 $ (26) $ 259 $ 231 $ 231

Total restructuring plans . . . . . . . . . . . . . $807 $114 $ (73) $(601) $41 $288

At October 31, 2004 and October 31, 2003, HP included the long-term portion of the restructuringliability of $95 million and $98 million, respectively, in Other liabilities in the accompanyingConsolidated Balance Sheets.

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Notes to Consolidated Financial Statements (Continued)

Note 8: Financial Instruments

Investments in Debt and Equity Securities

Investments in available-for-sale debt and equity securities at fair value were as follows atOctober 31:

2004 2003

Gross Gross Estimated Gross Gross EstimatedUnrealized Unrealized Fair Unrealized Unrealized Fair

Cost Gains Losses Value Cost Gains Losses Value

In millions

Available-for-Sale SecuritiesDebt securities:

Municipal securities . . . . . . . . $ 81 $ 81Repurchase agreements . . . . . $ 70 $— $— $ 70 120 $ 8 $ — 128Time deposits . . . . . . . . . . . . 263 — — 263 216 — — 216Other debt securities . . . . . . . — — — — 61 2 — 63

Total debt securities . . . . . . . . . . 333 — — 333 478 10 — 488Equity securities in public

companies . . . . . . . . . . . . . . . 35 40 (5) 70 35 63 (1) 97

$368 $40 $(5) $403 $513 $73 $ (1) $585

Other debt securities consist primarily of collateralized notes with banks and corporate debtsecurities. Equity securities in public companies are primarily common stock.

HP estimated the fair values based on quoted market prices or pricing models using currentmarket rates. These estimated fair values may not be representative of actual values of the financialinstruments that could have been realized as of year-end or that will be realized in the future.

In May 2003, HP sold an investment in a debt security with a net book value of $65 millionclassified as a held-to-maturity security. The proceeds of this sale were used for operating purposes. Asthe book value of the debt security approximated the market value on the date of sale, the realized lossassociated with this sale was not material. As a result of this transaction, HP reclassified all held-to-maturity securities, composed of approximately $200 million in time deposits, into available-for-salesecurities. The book value of these securities approximated the estimated fair value and the netunrealized loss, which was not material, was recognized in accumulated other comprehensive loss as aseparate component of stockholders’ equity.

The gross unrealized losses as of October 31, 2004 and 2003 were associated with investments inpublic equity securities with a fair value of $9 million and $1 million, respectively, and have been in acontinuous loss position for less than 12 months.

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Notes to Consolidated Financial Statements (Continued)

Note 8: Financial Instruments (Continued)

Contractual maturities of available-for-sale debt securities were as follows at October 31, 2004:

Available-for-SaleSecurities

EstimatedCost Fair Value

In millions

Due in less than one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $311 $311Due in 1-5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 22

$333 $333

Proceeds from sales or maturities of available-for-sale and other securities were $1.1 billion infiscal 2004, $588 million in fiscal 2003 and $90 million in fiscal 2002. The gross realized gains andlosses totaled $27 million and $4 million, respectively, in fiscal 2004. Gross realized gains and lossestotaled $36 million and $8 million, respectively, in fiscal 2003. Gross realized losses totaled $2 millionin fiscal 2002. The specific identification method is used to account for gains and losses onavailable-for-sale securities. A summary of the carrying values and balance sheet classification of allinvestments in debt and equity was as follows at October 31:

2004 2003

In millions

Available-for-sale debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 311 $ 403

Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311 403

Available-for-sale debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 85Available-for-sale equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 97Equity securities in privately-held companies and other investments . . . . . . . . . . . . . . 388 577

Included in long-term financing receivables and other assets . . . . . . . . . . . . . . . . . 480 759

Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 791 $1,162

Derivative Financial Instruments

HP is a global company that is exposed to foreign currency exchange rate fluctuations and interestrate changes in the normal course of its business. As part of its risk management strategy, HP usesderivative instruments, including forward contracts, swaps and options to hedge certain foreign currencyand interest rate exposures. HP’s objective is to offset gains and losses resulting from these exposureswith losses and gains on the derivative contracts used to hedge them, respectively, thereby reducingvolatility of earnings or protecting fair values of assets and liabilities. HP does not use derivativecontracts for speculative purposes. HP applies hedge accounting based upon the criteria established bySFAS No. 133, ‘‘Accounting for Derivative Instruments and Hedging Activities,’’ whereby HP designatesits derivatives as fair value hedges, cash flow hedges or net investment hedges.

Fair Value Hedges

HP enters into fair value hedges to reduce the exposure of its debt and investment portfolios toboth interest rate risk and foreign currency exchange rate risk. HP issues long-term debt in either U.S.

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Notes to Consolidated Financial Statements (Continued)

Note 8: Financial Instruments (Continued)

dollars or foreign currencies based on market conditions at the time of financing. HP then typicallyuses interest rate swaps to modify the market risk exposures in connection with the debt to achieveprimarily U.S. dollar LIBOR-based floating interest expense and to manage exposure to changes inforeign currency exchange rates. The swap transactions generally involve the exchange of fixed forfloating interest payment obligations and, when the underlying debt is denominated in a foreigncurrency, exchange of the foreign currency principal and interest obligations for U.S. dollar-denominated amounts. Alternatively, HP may choose not to swap fixed debt to a floating rate or mayterminate a previously executed swap if the fixed rate positions provide a more beneficial relationshipbetween assets and liabilities. Similarly, HP may choose not to hedge the foreign currency riskassociated with its foreign currency-denominated debt if this debt acts as a natural foreign currencyhedge for assets denominated in the same currency. In order to hedge the fair value of certainfixed-rate investments, HP periodically may enter into interest rate swaps that convert fixed interestreturns into variable interest returns. As of October 31, 2004, HP had a total notional amount ofapproximately $6 billion in fair value hedges. For derivative instruments that are designated and qualifyas fair value hedges, HP recognizes the gain or loss on the derivative instrument, as well as theoffsetting loss or gain on the hedged item, in earnings in the current period. In September 2002, HPterminated an interest rate swap that effectively converted fixed rate interest to variable rate interest ondebt that matures in 2005. The deferred gain of $185 million on this termination is being amortized asa reduction of interest expense over the remaining life of the underlying debt. During fiscal 2004 and2003, HP’s interest rate swap terminations were not material.

Cash Flow Hedges

HP uses cash flow hedges to hedge the variability of LIBOR-based interest income received oncertain variable-rate investments. HP enters into interest rate swaps that convert variable rate interestreturns into fixed-rate interest returns. As of October 31, 2004, HP had a total notional amount of$250 million in interest rate swaps classified as cash flow hedges. For interest rate swaps that aredesignated and qualify as cash flow hedges, changes in the fair values are recorded in accumulatedother comprehensive income as a separate component of stockholders’ equity and subsequently arereclassified into earnings in the period during which the hedged transaction is recognized in earnings.

HP uses a combination of forward contracts and options designated as cash flow hedges to protectagainst the foreign currency exchange rate risks inherent in its forecasted net revenue and, to a lesserextent, cost of sales denominated in currencies other than the U.S. dollar. HP’s foreign currency cashflow hedges mature generally within six months. However, certain leasing revenue-related forwardcontracts extend for the duration of the lease term, which can be up to five years. As of October 31,2004, HP had a total notional amount of $4.9 billion of forwards and options. For derivativeinstruments that are designated and qualify as cash flow hedges, HP initially records the effectiveportions of the gain or loss on the derivative instrument in accumulated other comprehensive incomeas a separate component of stockholders’ equity and subsequently reclassifies these amounts intoearnings in the period during which the hedged transaction is recognized in earnings. HP reports theineffective portion of the gain or loss, if any, in other income or expense immediately. HP reports theeffective portion of cash flow hedges in the same financial statement line item as the changes in valueof the hedged item. As of October 31, 2004, HP expects $98 million of derivative losses included inaccumulated other comprehensive income to be reclassified into earnings within the next twelvemonths.

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Notes to Consolidated Financial Statements (Continued)

Note 8: Financial Instruments (Continued)

Net Investment Hedges

HP uses forward contracts designated as net investment hedges to hedge net investments in certainforeign subsidiaries whose functional currency is the local currency. As of October 31, 2004, HP had atotal notional amount of $750 million in forward contracts. For derivative instruments that aredesignated as net investment hedges, HP records the effective portion of the gain or loss on thederivative instrument in cumulative translation adjustment as a separate component of stockholders’equity. The loss on net investment hedges included in cumulative translation adjustment was$43 million and $18 million in the fiscal years ended October 31, 2004 and 2003, respectively. HPreports the effective portion of net investment hedges in the same financial statement line item as thechanges in value of the hedged item.

Other Derivatives

Other derivatives not designated as hedging instruments under SFAS No. 133 consist primarily offorward contracts used to hedge foreign currency balance sheet exposures and warrants in companiesinvested in as part of strategic relationships. As of October 31, 2004, HP had a total notional amountof $14 billion in other derivatives not designated as hedging instruments. For derivative instruments notdesignated as hedging instruments under SFAS No. 133, HP recognizes changes in the fair values inearnings in the period of change. HP recognizes the gains and losses on foreign currency forwardcontracts used to hedge balance sheet exposures in interest and other, net in the same period as theremeasurement gain and loss of the related foreign currency denominated assets and liabilities and thusnaturally offsets these gains and losses. HP recognized net foreign currency exchange losses ofapproximately $142 million in fiscal 2004, $125 million in fiscal 2003 and $165 million in fiscal 2002which related primarily to forward points in its hedging contracts.

Hedge Effectiveness

For interest rate swaps designated as fair value hedges, HP measures effectiveness by offsetting thechange in fair value of the hedged debt or investment with the change in fair value of the derivative.For interest rate swaps designated as cash flow hedges, HP measures the hedging effectiveness byoffsetting the change in the variable portion of the interest rate swaps with the changes in expectedinterest income received due to the fluctuations in the LIBOR based interest rate. For foreign currencyoption and forward contracts designated as cash flow or net investment hedges, HP measures hedgeeffectiveness by comparing the cumulative change in the hedge contract with the cumulative change inthe hedged item, both of which are based on forward rates. Any ineffective portion of the hedge, aswell as amounts not included in the assessment of effectiveness, are recognized in interest and other,net. As of October 31, 2004, the portion of hedging instruments’ gains or losses excluded from theassessment of effectiveness was not material for fair value, cash flow or net investment hedges. Hedgeineffectiveness for fair value, cash flow and net investment hedges was not material in the fiscal yearsended October 31, 2004, 2003 and 2002. As of October 31, 2004, amounts related to derivativesqualifying as cash flow hedges amounted to a reduction of accumulated other comprehensive income of$115 million, net of tax, of which $98 million was expected to be transferred to earnings in the next12 months along with the earnings effects of the related forecasted transactions. In addition, duringfiscal 2004 and 2003 HP did not discontinue any cash flow hedges for which it was probable that aforecasted transaction would not occur.

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Notes to Consolidated Financial Statements (Continued)

Note 8: Financial Instruments (Continued)

HP estimates the fair values of derivatives based on quoted market prices or pricing models usingcurrent market rates and records all derivatives on the balance sheet at fair value. The fair marketvalue of derivative financial instruments and the respective SFAS No. 133 classification on theConsolidated Balance Sheets was as follows at October 31:

2004

Long-termFinancing

Other Receivables OtherCurrent and Accrued OtherAssets Other Assets Liabilities Liabilities Total

In millions

Fair value hedges . . . . . . . . . . . . . . . . . . . . . . . . . $ 3 $ 26 $ — $ (21) $ 8Cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . 11 4 (143) (14) (142)Net investment hedges . . . . . . . . . . . . . . . . . . . . . — — (43) — (43)Other derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . 131 8 (345) (71) (277)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $145 $ 38 $(531) $(106) $(454)

2003

Long-termFinancing

Other Receivables OtherCurrent and Accrued OtherAssets Other Assets Liabilities Liabilities Total

In millions

Fair value hedges . . . . . . . . . . . . . . . . . . . . . . . . . $ — $120 $ — $(55) $ 65Cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . 21 — (126) (21) (126)Net investment hedges . . . . . . . . . . . . . . . . . . . . . — — (18) — (18)Other derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . 155 28 (529) — (346)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $176 $148 $(673) $(76) $(425)

Fair Value of Other Financial Instruments

For certain of HP’s financial instruments, including cash and cash equivalents, short-terminvestments, accounts receivable, financing receivables, notes payable and short-term borrowings,accounts payable and other accrued liabilities, the carrying amounts approximate fair value due to theirshort maturities. The estimated fair value of HP’s short- and long-term debt was approximately$6.9 billion at October 31, 2004, compared to a carrying value of $7.1 billion at that date. Theestimated fair value of the debt is based primarily on quoted market prices, as well as borrowing ratescurrently available to HP for bank loans with similar terms and maturities.

Note 9: Financing Receivables and Operating Leases

Financing receivables represent sales-type and direct-financing leases resulting from the marketingof HP’s and complementary third-party products. These receivables typically have terms from two tofive years and are usually collateralized by a security interest in the underlying assets. Financingreceivables also include billed receivables from operating leases. The components of net financing

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Notes to Consolidated Financial Statements (Continued)

Note 9: Financing Receivables and Operating Leases (Continued)

receivables, which are included in financing receivables and long-term financing receivables and otherassets, were as follows at October 31:

2004 2003

In millions

Minimum lease payments receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,328 $ 6,010Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (213) (210)Unguaranteed residual value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394 446Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (396) (475)

Financing receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,113 5,771Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,945) (3,026)

Amounts due after one year, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,168 $ 2,745

Scheduled maturities of HP’s minimum lease payments receivable are as follows at October 31,2004:

2005 2006 2007 2008 2009 Thereafter Total

In millions

Scheduled maturities of minimumlease payments receivable . . . . . . $ 3,045 $ 1,381 $ 612 $ 194 $ 67 $ 29 $ 5,328

Equipment leased to customers under operating leases was $2.3 billion at October 31, 2004 and$2.1 billion at October 31, 2003, and is included in machinery and equipment. Accumulateddepreciation on equipment under lease was $0.9 billion at October 31, 2004 and $1.2 billion atOctober 31, 2003. Minimum future rentals on non-cancelable operating leases related to leasedequipment are as follows at October 31, 2004:

2005 2006 2007 2008 2009 Thereafter Total

In millions

Minimum future rentals on non-cancelable operating leases . . . . . $ 824 $ 404 $ 103 $ 18 $ 3 $ 11 $ 1,363

Note 10: Guarantees

Indemnifications

In the ordinary course of business, HP enters into contractual arrangements under which HP mayagree to indemnify the third party to such arrangement from any losses incurred relating to the servicesthey perform on behalf of HP or for losses arising from certain events as defined within the particularcontract, which may include, for example, litigation or claims relating to past performance. Suchindemnification obligations may not be subject to maximum loss clauses. Historically, payments maderelated to these indemnifications have been immaterial.

Warranty

HP provides for the estimated cost of product warranties at the time it recognizes revenue. HPengages in extensive product quality programs and processes, including actively monitoring andevaluating the quality of its component suppliers; however, product warranty terms offered to

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Notes to Consolidated Financial Statements (Continued)

Note 10: Guarantees (Continued)

customers, ongoing product failure rates, material usage and service delivery costs incurred incorrecting a product failure, as well as specific product class failures outside of HP’s baselineexperience, affect the estimated warranty obligation. If actual product failure rates, material usage orservice delivery costs differ from estimates, revisions to the estimated warranty liability would berequired.

Information regarding the changes in HP’s aggregate product warranty liabilities is as follows atOctober 31:

2004 2003

In millions

Product warranty liability at beginning of year . . . . . . . . . . . . . . . . . . . . . $ 1,987 $ 2,157Accruals for warranties issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,504 2,233Adjustments related to pre-existing warranties (including changes in

estimates) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (86) (17)Settlements made (in cash or in kind) . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,365) (2,386)

Product warranty liability at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,040 $ 1,987

Deferred Revenue

The components of deferred revenue were as follows at October 31:

2004 2003

In millions

Deferred support contract services revenue . . . . . . . . . . . . . . . . . . . . . . . . . $2,780 $2,535Other deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,568 1,130

Total deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,348 3,665Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,958 2,496

Long-term deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,390 $1,169

Deferred support contract services revenue represents amounts received or billed in advanceprimarily for fixed-price support or maintenance contracts. These services include stand-alone productsupport packages, routine maintenance service contracts, upgrades or extensions to standard productwarranty, as well as high availability services for complex, global, networked, multi-vendorenvironments. These service amounts are deferred at the time the customer is billed and thenrecognized ratably over the contract life or as the services are rendered.

Other deferred revenue represents amounts received or billed in advance for contracts relatedprimarily to consulting and integration projects, managed services start-up or transition work, as well asminor amounts for training, and product sales. HP recognizes the majority of these amounts as revenuebased on the proportional performance method.

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Notes to Consolidated Financial Statements (Continued)

Note 11: Borrowings

Notes Payable and Short-Term Borrowings

Notes payable and short-term borrowings, including the current portion of long-term debt, were asfollows at October 31:

2004 2003

Weighted WeightedAmount Average Amount Average

Outstanding Interest Rate Outstanding Interest Rate

In millions

Current portion of long-term debt . . . . . . . . . . . . . . . . . $1,861 7.1% $ 281 6.3%Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306 2.2% 437 2.0%Notes payable to banks, lines of credit and other . . . . . . 344 2.4% 362 1.7%

$2,511 $1,080

Notes payable to banks, lines of credit and other includes deposits, primarily by banks, ofapproximately $241 million and $192 million at October 31, 2004 and 2003, respectively.

Long-Term Debt

Long-term debt was as follows at October 31:2004 2003

In millions

U.S. Dollar Global Notes$1,500 issued June 2000 at 7.15%, due June 2005 . . . . . . . . . . . . . . . . . . . . . . . . $ 1,499 $1,498$1,000 issued December 2001 at 5.75%, due December 2006 . . . . . . . . . . . . . . . . 998 997$1,000 issued June 2002 at 5.5%, due July 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . 997 996$500 issued June 2002 at 6.5%, due July 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . 498 498$500 issued March 2003 at 3.625%, due March 2008 . . . . . . . . . . . . . . . . . . . . . . 498 497

4,490 4,486Euro Medium-Term Note ProgrammeA750 issued July 2001 at 5.25%, due July 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . 954 870

Series A Medium-Term Notes$60 issued September 2001 at a floating rate, due September 2004 . . . . . . . . . . . . — 60$200 issued December 2002 at 3.375%, due December 2005 . . . . . . . . . . . . . . . . . 200 199$50 issued in December 2002 at 4.25%, due December 2007 . . . . . . . . . . . . . . . . 50 50

250 309Other

$300, Medium-Term Notes assumed from Compaq, issued at 7.65%, dueAugust 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 300

$505, U.S. dollar zero-coupon subordinated convertible notes, issued in Octoberand November 1997 at an imputed rate of 3.13%, due 2017 (‘‘LYONs’’) . . . . . . 338 328

Other, including capital lease obligations, at 3.96%-9.17%, due 2003-2023 . . . . . . . 108 316446 644

Fair value adjustment related to SFAS No. 133 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 166Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,861) (281)

$ 4,623 $6,494

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Notes to Consolidated Financial Statements (Continued)

Note 11: Borrowings (Continued)

HP may redeem some or all of the Global Notes, Medium Term Notes, Series A Medium TermNotes and the Euro Medium-Term Notes (collectively, the ‘‘Notes’’), as set forth in the above table, atany time at the redemption prices described in the prospectus supplements relating thereto. The Notesare senior unsecured debt.

The LYONs are convertible by the holders at an adjusted rate of 15.09 shares of HP commonstock for each $1,000 face value of the LYONs, payable in either cash or common stock at HP’selection. At any time, HP may redeem the LYONs at book value, payable in cash only. InDecember 2000, the Board of Directors authorized a repurchase program for the LYONs that allowedHP to repurchase the LYONs from time to time at varying prices. In fiscal 2002, HP repurchased$257 million in face value of the LYONs with a book value of $158 million for an aggregate purchaseprice of $127 million, resulting in a gain of $31 million. The gain is included in Gains (losses) oninvestments and early extinguishment of debt in the Consolidated Statements of Operations. HP didnot repurchase any LYONs in fiscal 2004 or 2003.

HP established a $4.0 billion U.S. commercial paper program in December 2000. Hewlett-PackardInternational Bank PLC, a wholly-owned subsidiary of HP, established a $500 million Euro CommercialPaper/Certificate of Deposit Programme in May 2001.

HP’s $1.7 billion 364-day credit facility expiring in March 2004 and $1.3 billion three-year creditfacility expiring in March 2005 were replaced with a $1.5 billion 364-day credit facility and a $1.5 billionfive-year credit facility, respectively, in March 2004 (together, the ‘‘Credit Facilities’’). Interest rates andother terms of borrowing under the Credit Facilities vary, as applicable, based on HP’s external creditratings. The Credit Facilities, which are subject to weighted average commitment fees of eight basispoints per annum on the unused portion, are senior unsecured committed borrowing arrangements andavailable for general corporate purposes, including supporting the issuance of commercial paper.

HP also maintains, through various foreign subsidiaries, lines of credit from a number of financialinstitutions.

HP registered the sale of up to $3.0 billion of debt or global securities (‘‘Global Notes’’), commonstock, preferred stock, depositary shares and warrants under a shelf registration statement inMarch 2002 (the ‘‘2002 Shelf Registration Statement’’). In December 2002, HP filed a supplement tothe 2002 Shelf Registration Statement, which allows HP to offer from time to time up to $1.5 billion ofMedium-Term Notes, Series B, due nine months or more from the date of issuance (the ‘‘Series BMedium-Term Note Program’’). HP may redeem any Series B Medium-Term Notes at any time at theredemption prices described in the prospectus supplements relating thereto. As of October 31, 2004,HP has not issued Medium-Term Notes pursuant to the Series B Medium-Term Note Program.

HP registered the sale of up to $3.0 billion of Medium-Term Notes under its Euro Medium-TermNote Programme filed with the Luxembourg Stock Exchange and has offered such notes as set forth inthe table above. HP can denominate these notes in any currency including the Euro. However, thesenotes have not been and will not be registered in the United States.

At October 31, 2004, HP has available borrowing resources of up to $12.7 billion under the 2002registration statement, credit facilities and other programs described above.

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Notes to Consolidated Financial Statements (Continued)

Note 11: Borrowings (Continued)

Aggregate future maturities of debt at face value (including the fair value adjustment related toSFAS No. 133 of $44 million) are as follows at October 31, 2004:

2005 2006 2007 2008 2009 Thereafter Total

In millions

Aggregate future maturities of debtoutstanding including capital leaseobligations . . . . . . . . . . . . . . . . . $ 1,861 $ 1,169 $ 2,006 $ 561 $ 4 $ 1,067 $ 6,668

Interest expense on borrowings was $247 million in fiscal 2004, $277 million in fiscal 2003 and$212 million in fiscal 2002.

Note 12: Taxes on Earnings

The provision for (benefit from) taxes on earnings was as follows for the fiscal years endedOctober 31:

2004 2003 2002

In millions

U.S. federal taxes:Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 302 $(127) $(768)Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (161) (254) (1)

Non-U.S. taxes:Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 516 533 334Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 159 202

State taxes:Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (96) 57 100Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (49) (19) 15

$ 699 $ 349 $(118)

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 12: Taxes on Earnings (Continued)

The significant components of deferred tax assets and deferred tax liabilities were as follows atOctober 31:

2004 2003

Deferred Deferred Deferred DeferredTax Tax Tax Tax

Assets Liabilities Assets Liabilities

In millions

Loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 403 $ — $ 430 $ —Credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 678 — 1,241 —Unremitted earnings of foreign subsidiaries . . . . . . . . . . . . . . — 2,347 — 1,764Inventory valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 81 263 133Intercompany transactions—profit in inventory . . . . . . . . . . . . 587 — 465 —Intercompany transactions—excluding inventory . . . . . . . . . . . 1,814 — 1,215 —Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 13 324 18Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 595 — 579 —Employee and retiree benefits . . . . . . . . . . . . . . . . . . . . . . . . 1,067 205 974 51Accounts receivable allowance . . . . . . . . . . . . . . . . . . . . . . . . 186 — 247 21Capitalized research and development . . . . . . . . . . . . . . . . . . 2,582 — 1,775 —Purchased intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . 219 832 293 836Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 — 231 —Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289 — 396 —Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 673 47 728 299

Gross deferred tax assets and liabilities . . . . . . . . . . . . . . . . . 9,522 3,525 9,161 3,122Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (447) — (400) —

Total deferred tax assets and liabilities . . . . . . . . . . . . . . . . . . $9,075 $3,525 $8,761 $3,122

At October 31, 2004, HP had a deferred tax asset of $403 million in loss carryforwards, of which$398 million relates to foreign net operating losses. HP has provided a valuation allowance of$321 million on those foreign net operating loss carryforwards which are not likely to be utilized. Ofthe total tax credit carryforwards of $678 million, HP had alternative minimum tax credit carryforwardsof $391 million, which do not expire, and research and development credit carryforwards of $83 million,which will expire in fiscal 2023 and 2024. HP also had tax credits of $204 million in foreign countries,on which HP has provided a valuation allowance of $29 million.

Gross deferred tax assets at October 31, 2004 and 2003 were reduced by valuation allowances of$447 million and $400 million, respectively. At October 31, 2004, in addition to $350 million ofvaluation allowances on foreign net operating losses and tax credits, HP had valuation allowances of$92 million and $5 million on unrealized capital losses and other items, respectively. Of the$447 million in valuation allowances at October 31, 2004, $139 million was related to certain Compaqdeferred tax assets existing at the time of the acquisition. In the future, if we determine that therealization of these Compaq deferred tax assets is more likely than not, the reversal of the relatedvaluation allowance will reduce goodwill instead of the provision for taxes.

Of the total tax benefits resulting from the exercise of employee stock options and other employeestock programs, the amounts booked to stockholders’ equity were approximately $35 million in fiscal2004, $24 million in fiscal 2003 and $21 million in fiscal 2002.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 12: Taxes on Earnings (Continued)

The differences between the U.S. federal statutory income tax rate (benefit) and HP’s effective taxrate (benefit) were as follows for the fiscal years ended October 31:

2004 2003 2002

U.S. federal statutory income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% (35.0)%State income taxes, net of federal tax benefit . . . . . . . . . . . . . . . . . . . . (2.3) 0.8 6.9Lower rates in other jurisdictions, net . . . . . . . . . . . . . . . . . . . . . . . . . (15.3) (23.9) (36.0)Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 17.5In-process research and development . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 — 27.2Acquisition-related charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 7.1Divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (12.9)Research and development credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.6) (1.9) (3.9)Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 1.2 16.7Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.3) 0.9 0.8

16.7% 12.1% (11.6)%

In fiscal 2004, the tax rate benefited from net favorable adjustments to previously estimated taxliabilities of $207 million, which decreased the provision for taxes by approximately $0.07 per share.Excluding these adjustments, our tax rate for the year would have been 21.6%. The most significantfavorable adjustments related to the resolution of a California state tax audit, a net favorable revisionto estimated tax accruals upon filing the 2003 U.S. income tax return, and a reduction in taxes onforeign earnings due to a change in regulatory policy. These favorable adjustments were offset in partby the net effect of smaller adjustments to income tax liabilities in various jurisdictions.

The domestic and foreign components of earnings (losses) were as follows for the fiscal yearsended October 31:

2004 2003 2002

In millions

U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (603) $ 661 $(3,655)Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,799 2,227 2,634

$4,196 $2,888 $(1,021)

As a result of certain employment actions and capital investments undertaken by HP, income frommanufacturing activities in certain countries is subject to reduced tax rates, and in some cases is whollyexempt from taxes, through fiscal 2018. The gross income tax benefits attributable to the tax status ofthese subsidiaries were estimated to be approximately $947 million ($0.31 per share) in fiscal 2004,$705 million ($0.23 per share) in fiscal 2003 and $473 million ($0.19 per share) in fiscal 2002. The grossincome tax benefits were offset partially by accruals of U.S. income taxes on undistributed earnings,among other factors.

The Internal Revenue Service (‘‘IRS’’) has completed its examination of the income tax returns ofHP for all years through 1998 and of Compaq for all years through 1997. HP’s tax years from 1993through 1998 are currently before the IRS’s Appeals Division. As of October 31, 2004, the IRS was inthe process of examining HP’s income tax returns for years 1999 through 2003 and Compaq’s incometax returns for years 1998 through 2002. In addition, HP is subject to numerous ongoing audits by state

123

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Notes to Consolidated Financial Statements (Continued)

Note 12: Taxes on Earnings (Continued)

and foreign tax authorities. HP believes that adequate accruals for HP and Compaq have beenprovided for all years.

HP has not provided for U.S. federal income and foreign withholding taxes on $15.0 billion ofundistributed earnings from non-U.S. operations as of October 31, 2004 because such earnings areintended to be reinvested indefinitely outside of the United States. Where excess cash has accumulatedin HP’s non-U.S. subsidiaries and it is advantageous for business operations, tax or cash reasons,subsidiary earnings are remitted. If these earnings were distributed, foreign tax credits may becomeavailable under current law to reduce or eliminate the resulting U.S. income tax liability. HP has notreevaluated its position with respect to the indefinite reinvestment of foreign earnings to take intoaccount the possible election of the repatriation provisions contained in the American Jobs CreationAct of 2004. The status of HP’s evaluation of these provisions is described in the following section.

American Jobs Creation Act of 2004—Repatriation of Foreign Earnings

The American Jobs Creation Act of 2004 (the ‘‘Jobs Act’’), enacted on October 22, 2004, providesfor a temporary 85% dividends received deduction on certain foreign earnings repatriated during aone-year period. The deduction would result in an approximate 5.25% federal tax rate on therepatriated earnings. To qualify for the deduction, the earnings must be reinvested in the United Statespursuant to a domestic reinvestment plan established by a company’s chief executive officer andapproved by the company’s board of directors. Certain other criteria in the Jobs Act must be satisfiedas well. The maximum amount of HP’s foreign earnings that qualify for the temporary deduction is$14.5 billion. For HP, the one-year period during which the qualifying distributions can be made isfiscal 2005.

HP is in the process of evaluating whether it will repatriate foreign earnings under the repatriationprovisions of the Jobs Act, and if so, the amount that will be repatriated. The range of reasonablypossible amounts that HP is considering for repatriation, which would be eligible for the temporarydeduction, is zero to $14.5 billion. HP is awaiting the issuance of further regulatory guidance andpassage of statutory technical corrections with respect to certain provisions in the Jobs Act prior todetermining the amounts it will repatriate. If such regulatory guidance or technical corrections arefavorable, HP is likely to repatriate amounts in the high end of its range. HP expects to determine theamounts and sources of foreign earnings to be repatriated, if any, during the third quarter of fiscal2005.

HP is not yet in a position to determine the impact of a qualifying repatriation, should it choose tomake one, on its income tax expense for fiscal 2005, the amount of its indefinitely reinvested foreignearnings, or the amount of its deferred tax liability with respect to foreign earnings. If HP were to planto repatriate the maximum amount eligible for the temporary deduction, which is $14.5 billion, fromforeign earnings which were previously indefinitely reinvested, HP estimates it would accrue additionaltax expense in fiscal 2005 of between $850 million and $925 million. The amount of additional taxexpense accrued would be reduced if some part of the eligible dividend was attributable to foreignearnings on which a deferred tax liability had been previously accrued (that is, on non-indefinitelyreinvested earnings).

124

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Notes to Consolidated Financial Statements (Continued)

Note 13: Stockholders’ Equity

Dividends

The stockholders of HP common stock are entitled to receive dividends when and as declared byHP’s Board of Directors. Dividends are paid quarterly. Dividends were $0.32 per common share ineach of fiscal 2004, 2003 and 2002.

Employee Stock Purchase Plan

HP sponsors the Hewlett-Packard Company 2000 Employee Stock Purchase Plan, also known asthe Share Ownership Plan (the ‘‘ESPP’’), a non-compensatory plan where eligible employees maycontribute up to 10% of base compensation, subject to certain income limits, to purchase shares ofHP’s common stock. The stock is purchased semi-annually at a price equal to 85% of the fair marketvalue at certain plan-defined dates. At October 31, 2004, approximately 143,000 employees were eligibleto participate, and approximately 62,000 employees were participants in the ESPP. In fiscal 2004,participants purchased 25,868,000 shares of HP common stock at a weighted-average price of $14 pershare. In fiscal 2003, participants purchased 23,884,000 shares of HP common stock at a weighted-average price of $14 per share. In fiscal 2002, participants purchased 18,536,000 shares of HP commonstock at a weighted-average price of $14 per share.

As of October 31, 2000 employees no longer were permitted to make contributions to the Hewlett-Packard Company Employee Stock Purchase Plan (the ‘‘Legacy ESPP’’). At October 31, 2004 and 2003,there were no remaining unvested shares in the Legacy ESPP. Compensation expense recognized underthe Legacy ESPP was $29 million in fiscal 2002 for shares that HP matched on employee stockpurchases.

Incentive Compensation Plans

HP has stock option plans, including principal plans adopted in 2000, 1995 and 1990, as well asvarious stock option plans assumed through acquisitions, under which stock options are outstanding. Allregular employees were considered eligible to receive stock options in fiscal 2004. There wereapproximately 135,000 employees holding options under one or more of the option plans as ofOctober 31, 2004. HP adopted an additional principal plan in fiscal 2004, under which no stock optionshave been granted. The principal plans adopted in 2004, 2000, 1995 and 1990 permit options granted toqualify as ‘‘incentive stock options’’ under the U.S. Internal Revenue Code. The exercise price of astock option generally is equal to the fair market value of HP’s common stock on the date the option isgranted. The term of options granted in fiscal 2004 and 2003 was generally eight years, while optionsgranted prior to fiscal 2003 generally had a ten-year term. Under the 2000 Stock Plan and the 1990 and1995 Incentive Stock Plans, HP may choose, in certain cases, to establish a discounted exercise price atno less than 75% of fair market value on the grant date. HP did not grant any discounted options infiscal 2004 and 2003. HP granted discounted options to purchase 679,000 shares in fiscal 2002. Optionsgenerally vest at a rate of 25% per year over a period of four years from the date of grant, with theexception of discounted options. Discounted options generally may not be exercised until the third orfifth anniversary of the option grant date, at which time such options become fully vested. The cost ofthe discounted options, determined to be the difference between the exercise price of the option andthe fair market value of HP’s common stock on the date of the option grant, is expensed ratably overthe option vesting period.

125

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 13: Stockholders’ Equity (Continued)

Option activity was as follows for the fiscal years ended October 31:

2004 2003 2002

Weighted- Weighted- Weighted-Average Average AverageExercise Exercise Exercise

Shares Price Shares Price Shares Price

Shares in thousands

Outstanding at beginning of year . . . . . . . . . . . . 499,858 $31 459,334 $32 217,441 $35Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,894 22 71,426 16 66,438 21Assumed through acquisitions . . . . . . . . . . . . . . . 2,507 14 — — 202,028 33Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,869) 13 (14,873) 10 (9,208) 7Forfeited or cancelled . . . . . . . . . . . . . . . . . . . . (11,522) 30 (16,029) 33 (17,365) 37

Outstanding at end of year . . . . . . . . . . . . . . . . . 549,868 30 499,858 31 459,334 32

Exercisable at end of year . . . . . . . . . . . . . . . . . 377,438 $33 326,829 $34 286,830 $34

Information about options outstanding was as follows at October 31, 2004:

Options Outstanding Options Exercisable

Weighted-Average

Remaining Weighted- Weighted-Contractual Average Average

Shares Life in Exercise Shares ExerciseRange of Exercise Prices Outstanding Years Price Exercisable Price

Shares in thousands

$0-$9.99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,967 4.4 $ 8 2,763 $ 9$10-$19.99 . . . . . . . . . . . . . . . . . . . . . . . . . . 130,697 5.6 $16 70,836 $16$20-$29.99 . . . . . . . . . . . . . . . . . . . . . . . . . . 210,854 5.8 $24 117,669 $25$30-$39.99 . . . . . . . . . . . . . . . . . . . . . . . . . . 85,037 4.6 $35 77,026 $35$40-$49.99 . . . . . . . . . . . . . . . . . . . . . . . . . . 68,641 4.4 $46 68,637 $46$50-$59.99 . . . . . . . . . . . . . . . . . . . . . . . . . . 33,633 4.6 $57 22,842 $56$60 and over . . . . . . . . . . . . . . . . . . . . . . . . 18,039 4.0 $71 17,665 $71

549,868 5.3 $30 377,438 $33

Under the 2000 Stock Plan and the 1990 and 1995 Incentive Stock Plans, certain employees weregranted cash, restricted stock awards, or both. Cash and restricted stock awards are independent ofoption grants and are subject to restrictions. The majority of the shares of restricted stock outstandingat October 31, 2004 are subject to forfeiture if employment terminates prior to the release ofrestrictions, generally one to three years from the date of grant. During that period, ownership of theshares cannot be transferred. Restricted stock has the same cash dividend and voting rights as othercommon stock and is considered to be currently issued and outstanding. The cost of the awards,determined to be the fair market value of the shares at the date of grant, is expensed ratably over theperiod the restrictions lapse. HP had 1,533,000 shares of restricted stock outstanding at October 31,2004, 1,008,000 shares of restricted stock outstanding at October 31, 2003 and 1,370,000 shares ofrestricted stock outstanding at October 31, 2002.

126

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 13: Stockholders’ Equity (Continued)

Compensation expense recognized under incentive compensation plans was approximately$48 million in fiscal 2004, $45 million in fiscal 2003 and $84 million in fiscal 2002.

Shares Reserved

Shares available for the ESPP and incentive compensation plans were 257,554,000 at October 31,2004, including 29,123,000 shares under the assumed Compaq plans, and 168,951,000 at October 31,2003, including 42,967,000 shares under the assumed Compaq plans.

HP had 808,855,000 shares of common stock reserved at October 31, 2004 and 670,929,000 sharesof common stock reserved at October 31, 2003 for future issuance under stock-related benefit plans.Additionally, HP had 21,494,000 shares of common stock reserved at October 31, 2004 and 2003 forfuture issuances related to conversion of zero-coupon subordinated notes.

Stock Repurchase Program

HP repurchases shares of its common stock under a systematic program to manage the dilutioncreated by shares issued under employee stock plans and also to return cash to HP’s stockholders. Thisprogram authorizes purchases in the open market or in private transactions. During fiscal year 2004HP’s Board of Directors authorized $5.0 billion for future repurchases of outstanding common stock,including authorization to repurchase $3.0 billion of HP shares during the fourth quarter. HPcompleted share repurchases of approximately 172 million shares for $3.3 billion, 40 million shares for$751 million and 40 million shares for $671 million in fiscal 2004, 2003 and 2002, respectively. Sharesrepurchased in fiscal 2004 included open market repurchases of 66 million shares for $1.3 billion,72 million shares for $1.3 billion under an accelerated share repurchase program with an investmentbank (the ‘‘Accelerated Purchase’’) and 34 million shares for $679 million from the David and LucilePackard Foundation (the ‘‘Packard Foundation’’). Shares repurchased from the Packard Foundation infiscal years 2003 and 2002 were 13 million shares and 3 million shares for $241 million and $31 million,respectively.

The Accelerated Purchase occurred on September 20, 2004 and was completed in November 2004,the first quarter of fiscal 2005. Upon completion of the program HP paid a $51 million priceadjustment based on the difference between the $18.82 weighted average price of the open marketstock purchases by the investment bank and the initial purchase price of $18.11 per share. The priceadjustment also included certain amounts reflecting the investment bank’s carrying costs or benefitsfrom purchasing shares at prices other than the initial price and its benefits from receiving the$1.3 billion payment in advance of its purchases. The Accelerated Purchase was accounted for as anequity transaction on the cash settlement dates.

Shares repurchased from the Packard Foundation are purchased under the terms of amemorandum of understanding dated September 9, 2002 and amended and restated September 17,2004 that, among other things, prices the repurchases by reference to the volume weighted-averageprice for composite New York Stock Exchange transactions on trading days in which a repurchaseoccurs. Either HP or the Packard Foundation may suspend or terminate sales under the amended andrestated memorandum of understanding at any time.

As of October 31, 2004, HP had authorization for remaining future repurchases of approximately$2.9 billion.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 14: Comprehensive Income (Loss)

The changes in the components of other comprehensive income (loss), net of taxes, were asfollows for the fiscal years ended October 31:

2004 2003 2002

In millions

Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,497 $2,539 $ (903)Net unrealized (losses) gains on available-for-sale securities:

Change in net unrealized (losses) gains, net of tax benefit of $12 in 2004,taxes of $20 in 2003 and tax benefit of $4 in 2002 . . . . . . . . . . . . . . . . (12) 36 (7)

Net unrealized gains reclassified into earnings, net of taxes of $5 in 2004,$2 in 2003 and $1 in 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) (3) (2)

(20) 33 (9)

Net unrealized (losses) gains on cash flow hedges:Change in net unrealized losses, net of tax benefits of $59 in 2004, $45 in

2003 and $19 in 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (100) (77) (41)Net unrealized losses (gains) reclassified into earnings, net of tax benefits

of $42 in 2004 and $17 in 2003 and taxes of $12 in 2002 . . . . . . . . . . . 72 29 (20)

(28) (48) (61)

Net change in cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . 21 2 7Net change in additional minimum pension liability, net of tax benefit of $3

in 2004, taxes of $97 in 2003 and tax benefit of $191 in 2002 . . . . . . . . . . (13) 211 (379)

Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,457 $2,737 $(1,345)

The components of accumulated other comprehensive loss, net of taxes, were as follows atOctober 31:

2004 2003

In millions

Net unrealized gains on available-for-sale securities . . . . . . . . . . . . . . . . . . . . $ 23 $ 43Net unrealized losses on cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . (115) (87)Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 9Additional minimum pension liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (181) (168)

Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(243) $(203)

Note 15: Retirement and Post-Retirement Benefit Plans

Substantially all of HP’s employees are covered under various defined benefit plans, definedcontribution plans, or both, when they have met the eligibility requirements. In addition, HP sponsorsmedical and life insurance plans that provide benefits to retired U.S. employees who meet eligibilityrequirements.

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Note 15: Retirement and Post-Retirement Benefit Plans (Continued)

Defined Benefit Plans

HP sponsors a number of defined benefit plans worldwide, of which the most significant are in theUnited States. For U.S employees hired or rehired on or after January 1, 2003, HP sponsors theHewlett-Packard Company Cash Account Pension Plan (the ‘‘Cash Account Pension Plan’’), a definedbenefit plan under which benefits accrue pursuant to a cash accumulation account formula based upona percentage of pay plus interest. The HP Retirement Plan (the ‘‘Retirement Plan’’) is a definedbenefit pension plan for U.S. employees hired on or before December 31, 2002. Benefits under theRetirement Plan generally are based on pay and years of service, except for eligible pre-acquisitionCompaq employees, who do not receive credit for years of service prior to January 1, 2003.

The benefit payable to a U.S. employee under the Retirement Plan for service before 1993, if any,is reduced by any amounts due to the employee under HP’s frozen defined contribution DeferredProfit-Sharing Plan (‘‘the DPSP’’). The DPSP was closed to new participants in 1993. The DPSP planobligations are equal to the plan assets and are recognized as an offset to the Retirement Plan whenHP calculates its defined benefit pension cost and obligations. The fair value of plan assets andprojected benefit obligations for the U.S. defined benefit plans combined with the DPSP as of theSeptember 30 measurement date is as follows:

2004 2003

Projected ProjectedPlan Benefit Plan Benefit

Assets Obligation Assets Obligation

In millions

U.S. defined benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,244 $4,970 $3,070 $4,408DPSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,197 1,197 1,151 1,151

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,441 $6,167 $4,221 $5,559

Post-Retirement Benefit Plans

U.S. employees hired or rehired on or after January 1, 2003 may be eligible to participate in apost-retirement medical plan, the HP Retiree Medical Program, but must bear the full cost of theirparticipation. In addition, substantially all of HP’s U.S. employees at December 31, 2002 could becomeeligible for retiree life insurance benefits and partially subsidized retiree medical benefits under thePre-2003 HP Retiree Medical Program (the ‘‘Pre-2003 Program’’) and certain other retiree medicalprograms. Plan participants in the Pre-2003 Program make contributions based on their choice ofmedical option and length of service.

The Medicare Act reduced HP’s post-retirement medical plan obligations and expense during fiscal2004. See Note 1 for a full description of the impact of the Medicare Act as adopted by HP in thethird quarter of fiscal 2004, retroactive to December 2003, the date of the enactment of the MedicareAct.

Defined Contribution Plans

HP offers various defined contribution plans for U.S. and non-U.S. employees. Total definedcontribution expense was $405 million in fiscal 2004, $377 million in fiscal 2003 and $309 million infiscal 2002. U.S. employees are automatically enrolled in the Hewlett-Packard Company 401(k) Plan

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Note 15: Retirement and Post-Retirement Benefit Plans (Continued)

(the ‘‘HP 401(k) Plan’’) when they meet eligibility requirements unless they decline participation. OnMay 3, 2002, HP assumed the sponsorship of the Compaq Computer Corporation 401(k) InvestmentPlan (the ‘‘Compaq 401(k) Plan’’). Effective January 1, 2004, the Compaq 401(k) Plan was merged intothe HP 401(k) Plan.

U.S. employees may contribute up to 50% of eligible compensation on a pre-tax basis, subject tocertain limits. Prior to January 1, 2003, the maximum employee contribution was 20% of eligiblecompensation. HP matches employee contributions with cash contributions up to a maximum of 4% ofeligible compensation. During the last eight months of calendar 2002 for the Compaq 401(k) Plan only,HP matched up to a maximum of 6% of eligible compensation.

Effective January 31, 2004, the HP Stock Fund has been designated as an Employee StockOwnership Plan and, as a result, participants in the HP Stock Fund may receive dividends in cash ormay reinvest such dividends into the HP Stock Fund. HP paid approximately $13 million in dividendsfor the HP common shares held by the HP Stock Fund in fiscal 2004. The dividends are recorded as areduction of retained earnings in the Consolidated Statements of Stockholders’ Equity. The HP StockFund held approximately 40 million shares of HP common stock at October 31, 2004.

Pension and Post-Retirement Benefit Expense

HP’s net pension and post-retirement benefit costs were as follows for the fiscal years endedOctober 31:

U.S. Defined Non-U.S. Defined Post-RetirementBenefit Plans Benefit Plans Benefit Plans

2004 2003 2002 2004 2003 2002 2004 2003 2002

In millions

Service cost . . . . . . . . . . . . . . . . . . . . . $ 320 $ 284 $ 220 $ 213 $ 168 $ 108 $ 55 $ 46 $ 26Interest cost . . . . . . . . . . . . . . . . . . . . . 266 262 188 265 203 118 103 101 52Expected return on plan assets . . . . . . . (247) (215) (174) (346) (217) (157) (30) (25) (34)Amortization and deferrals:

Actuarial loss (gain) . . . . . . . . . . . . . 29 63 30 93 83 14 25 23 (6)Prior service cost (benefit) . . . . . . . . . 3 2 3 (2) 1 1 (9) (2) (4)

Net periodic benefit cost . . . . . . . . . . . . 371 396 267 223 238 84 144 143 34

Curtailment loss (gain) . . . . . . . . . . . — — 1 — (6) (8) — — 70Settlement loss (gain) . . . . . . . . . . . . — — 30 (3) — 11 — — —Special termination benefits . . . . . . . . — — 194 11 16 — — — 21

Net benefit cost . . . . . . . . . . . . . . . . . . $ 371 $ 396 $ 492 $ 231 $ 248 $ 87 $ 144 $ 143 $ 125

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Notes to Consolidated Financial Statements (Continued)

Note 15: Retirement and Post-Retirement Benefit Plans (Continued)

The weighted average assumptions used to calculate net benefit cost were as follows for the fiscalyears ended October 31:

U.S. Defined Non-U.S. Defined Post-RetirementBenefit Plans Benefit Plans Benefit Plans

2004 2003 2002 2004 2003 2002 2004 2003 2002

Discount rate . . . . . . . . . . . . . . . . . . . . 6.5% 6.8% 7.0% 5.0% 5.2% 5.2% 6.5% 6.8% 7.0%Average increase in compensation levels . . 4.0% 4.5% 5.8% 3.6% 4.0% 4.2% — — —Expected long-term return on assets . . . 8.5% 8.5% 9.0% 6.9% 6.9% 7.5% 8.5% 8.5% 9.0%

The medical cost and related assumptions used to calculate the post-retirement benefit cost for thefiscal years ended October 31 were as follows:

2004 2003 2002

Current medical cost trend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5% 12.5% 7.8%Ultimate medical cost trend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5% 5.5% 5.5%Year the medical cost rate reaches ultimate trend rate . . . . . . . . . . . . . . . . . . . . . 2010 2010 2010

A 1.0 percentage point increase in the medical cost trend rate would have increased the fiscal 2004service and interest components of the post-retirement benefit costs by $7 million, while a1.0 percentage point decrease would have resulted in a decrease of $7 million in the same period.

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Notes to Consolidated Financial Statements (Continued)

Note 15: Retirement and Post-Retirement Benefit Plans (Continued)

Funded Status

The funded status of the defined benefit and post-retirement benefit plans was as follows atOctober 31:

U.S. Defined Non-U.S. Defined Post-RetirementBenefit Plans Benefit Plans Benefit Plans

2004 2003 2004 2003 2004 2003

In millions

Change in fair value of plan assets:Fair value—beginning of year . . . . . . . . . $ 3,070 $ 2,351 $ 4,576 $ 2,774 $ 353 $ 317Acquisition/addition/deletion of plans . . . . 3 — 70 400 — —Actual return on plan assets . . . . . . . . . . 376 460 407 351 43 56Employer contributions . . . . . . . . . . . . . . 10 488 564 722 49 45Participants’ contributions . . . . . . . . . . . . — — 37 31 25 20Benefits paid . . . . . . . . . . . . . . . . . . . . . (215) (229) (117) (111) (94) (85)Special termination benefits . . . . . . . . . . . — — (21) — — —Currency impact . . . . . . . . . . . . . . . . . . . — — 408 409 — —

Fair value—end of year . . . . . . . . . . . . . . 3,244 3,070 5,924 4,576 376 353

Change in benefit obligation:Benefit obligation—beginning of year . . . . 4,408 4,060 5,118 3,725 1,607 1,573Acquisition/addition/deletion of plans . . . . 10 22 142 512 2 39Service cost . . . . . . . . . . . . . . . . . . . . . . 320 284 213 168 55 46Interest cost . . . . . . . . . . . . . . . . . . . . . . 266 262 265 203 103 101Participants’ contributions . . . . . . . . . . . . — — 37 31 25 20Actuarial loss . . . . . . . . . . . . . . . . . . . . . 181 9 223 110 109 124Benefits paid . . . . . . . . . . . . . . . . . . . . . (215) (229) (117) (111) (94) (85)Plan amendments . . . . . . . . . . . . . . . . . . — — (37) (3) 52 (211)Special termination benefits . . . . . . . . . . . — — (11) 4 — —Currency impact . . . . . . . . . . . . . . . . . . . — — 451 479 2 —

Benefit obligation—end of year . . . . . . . . . . 4,970 4,408 6,284 5,118 1,861 1,607

Plan assets less than benefit obligation . . . . (1,726) (1,338) (360) (542) (1,485) (1,254)Unrecognized net experience loss . . . . . . . . 540 516 1,445 1,277 568 496Unrecognized prior service cost (benefit)

related to plan changes . . . . . . . . . . . . . . 8 11 (44) (8) (56) (116)

Net (accrued) prepaid amount recognized . . (1,178) (811) 1,041 727 (973) (874)Contributions after measurement date . . . . . — — 6 16 3 3

Net amount recognized . . . . . . . . . . . . . . . $(1,178) $ (811) $ 1,047 $ 743 $ (970) $ (871)

Accumulated benefit obligation . . . . . . . . . . $ 3,882 $ 3,503 $ 5,425 $ 4,360

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Notes to Consolidated Financial Statements (Continued)

Note 15: Retirement and Post-Retirement Benefit Plans (Continued)

The weighted average assumptions used to calculate the benefit obligation as of the measurementdates set forth in Note 1 were as follows:

U.S. Defined Non-U.S. Defined Post-RetirementBenefit Plans Benefit Plans Benefit Plans

2004 2003 2004 2003 2004 2003

Discount rate . . . . . . . . . . . . . . . . . . . . . . . 5.8% 6.5% 4.9% 5.0% 5.8% 6.5%Average increase in compensation levels . . . 4.0% 4.0% 3.7% 3.6% — —Current medical cost trend rate . . . . . . . . . — — — — 10.5% 11.5%Ultimate medical cost trend rate . . . . . . . . . — — — — 5.5% 5.5%Year the rate reaches ultimate trend rate . . . — — — — 2010 2010

A 1.0 percentage point increase in the medical cost trend rate would have increased the totalpost-retirement benefit obligation reported at October 31, 2004 by $73 million, while a 1.0 percentagepoint decrease would have resulted in a decrease of $71 million.

The net amount recognized for HP’s defined benefit and post-retirement benefit plans was asfollows at October 31:

U.S. Defined Non-U.S. Defined Post-RetirementBenefit Plans Benefit Plans Benefit Plans

2004 2003 2004 2003 2004 2003

In millions

Prepaid benefit costs . . . . . . . . . . . . . . . . . . . . . $ — $ — $1,306 $1,155 $ — $ —Other accrued liabilities . . . . . . . . . . . . . . . . . . . (300) — — — — —Pension, post-retirement and post-employment

liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,152) (1,073) (269) (428) (973) (874)Accumulated other comprehensive loss . . . . . . . . 274 262 4 — — —Contribution after measurement date . . . . . . . . . — — 6 16 3 3

Net amount recognized . . . . . . . . . . . . . . . . . . . $(1,178) $ (811) $1,047 $ 743 $(970) $(871)

Defined benefit plans with projected benefit obligations exceeding the fair value of plan assetswere as follows:

U.S. Defined Non-U.S. DefinedBenefit Plans Benefit Plans

2004 2003 2004 2003

In millions

Aggregate fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . $3,244 $3,070 $4,051 $3,323Aggregate projected benefit obligation . . . . . . . . . . . . . . . . . . . . . $4,970 $4,408 $4,512 $3,945

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Notes to Consolidated Financial Statements (Continued)

Note 15: Retirement and Post-Retirement Benefit Plans (Continued)

Defined benefit plans with accumulated benefit obligations exceeding the fair value of plan assetswere as follows:

U.S. Defined Non-U.S. DefinedBenefit Plans Benefit Plans

2004 2003 2004 2003

In millions

Aggregate fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . $3,244 $1,973 $ 98 $260Aggregate accumulated benefit obligation . . . . . . . . . . . . . . . . . . $3,882 $2,469 $271 $574

Plan Asset Allocations

HP’s weighted-average target and asset allocations at the September 30 measurement date were asfollows:

U. S. Defined Non-U.S. Defined Post-RetirementBenefit Plans Benefit Plans Benefit Plans

2004 2004 2004Plan Assets Plan Assets Plan AssetsTarget Target TargetAsset Category Allocation 2004 2003 Allocation 2004 2003 Allocation 2004 2003

Equity securities . . . . . . 71.4% 71.1% 64.8% 63.8% 69.4% 70.1%Private market securities 2.5% 2.4% — — 6.7% 6.4%Real estate and other . . 0.3% 0.5% 3.7% 5.1% 0.8% 1.0%

Equity-relatedinvestments . . . . . . 74% 74.2% 74.0% 65% 68.5% 68.9% 77% 76.9% 77.5%

Public debt securities . . 26% 25.8% 26.0% 35% 31.5% 31.1% 23% 23.1% 22.5%

Total . . . . . . . . . . . . 100% 100.0% 100.0% 100% 100.0% 100.0% 100% 100.0% 100.0%

Investment Policy

HP’s investment strategy for worldwide plan assets is to seek a competitive rate of return relativeto an appropriate level of risk. The majority of the plans’ investment managers employ activeinvestment management strategies with the goal of outperforming the broad markets in which theyinvest. Risk management practices include diversification across asset classes and investment styles, andperiodic rebalancing toward asset allocation targets. A number of the plans’ investment managers areauthorized to utilize derivatives for investment purposes, and HP occasionally utilizes derivatives toeffect asset allocation changes or to hedge certain investment exposures.

The target asset allocation selected for each plan reflects a risk/return profile HP feels isappropriate relative to each plan’s liability structure and return goals. HP regularly conducts periodicasset-liability studies for U.S. plan assets in order to model various potential asset allocations incomparison to each plan’s forecasted liabilities and liquidity needs. A portion of the U.S. definedbenefit plan assets and post-retirement benefit plan assets are invested in private market securities suchas venture capital funds, private debt and private equity to provide diversification and higher expectedreturns.

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Note 15: Retirement and Post-Retirement Benefit Plans (Continued)

Outside the U.S., local regulations require different approaches to target asset allocations, leaningtoward a higher percentage allocation in fixed income securities. For each country the local pensionboard decides on the target allocation. HP’s corporate office plays an important governance role inperiodically reviewing and approving the allocation strategy and providing a recommended list ofinvestment managers for each country plan.

Basis for Expected Long-Term Rate of Return on Plan Assets

The expected long-term rate of return on assets for each U.S. plan reflects the expected returnsfor each major asset class in which the plan invests, the weight of each asset class in the target mix, thecorrelations among asset classes, and their expected volatilities. Expected asset class returns reflectedthe current yield on U.S. government bonds and risk premiums for each asset class. HP consideredfactors such as historical risk premiums and current valuations, dividend yields, inflation and expectedearnings growth rates. Because HP’s investment policy is to employ primarily active investmentmanagers who seek to outperform the broader market, the asset class expected returns were adjustedto reflect the expected additional returns net of fees.

The approach used to arrive at the expected rate of return on assets for the non-U.S. plans was toapply an asset allocation policy of each plan to the expected country real returns for equity and fixedincome investments. On an annual basis, empirical data is gathered from the local country subsidiariesto determine expected long-term rates of return for equity and fixed income. These expected real ratesof return are then weighted based on country specific allocation mixes adjusted for inflation.

Future Contributions and Funding Policy

HP expects to contribute approximately $850 million to its pension plans and $60 million to itspost-retirement plans in fiscal 2005. HP’s funding policy is to contribute cash to its pension plans sothat at least the minimum contribution requirements, as established by local government and fundingand taxing authorities, are met. Contributions made to the post-retirement plans will be used primarilyfor the payment of retiree health claims incurred during the fiscal year.

Estimated Future Benefits Payable

HP estimates that the future benefits payable for the retirement and post-retirement plans in placeare as follows at October 31, 2004:

U.S. Defined Non-U.S. Defined Post-RetirementBenefit Plans Benefit Plans Benefit Plans

In millions

Fiscal year ending October 312005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 329 $ 133 $ 882006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 357 $ 129 $ 872007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 329 $ 147 $ 902008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 388 $ 155 $ 932009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 334 $ 173 $ 97

Next five fiscal years to October 31, 2014 . . . . . . . . . . . . $2,545 $1,115 $519

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Notes to Consolidated Financial Statements (Continued)

Note 16: Commitments

HP leases certain real and personal property under non-cancelable operating leases. Certain leasesrequire HP to pay property taxes, insurance and routine maintenance, and include escalation clauses.Rent expense was approximately $766 million in fiscal 2004, $703 million in fiscal 2003 and$566 million in fiscal 2002. Sublease rental income was approximately $43 million in fiscal 2004,$46 million in fiscal 2003 and $17 million in fiscal 2002.

Future annual minimum lease payments and sublease rental income commitments, excluding futureobligations included in the restructuring liabilities on the consolidated balance sheets, at October 31,2004 are as follows:

2005 2006 2007 2008 2009 Thereafter

In millions

Minimum lease payments . . . . . . . . . . . . . . . . . . . . . . $521 $417 $342 $285 $256 $360Less: Sublease rental income . . . . . . . . . . . . . . . . . . . . (27) (22) (18) (15) (15) (45)

$494 $395 $324 $270 $241 $315

At October 31, 2004, HP had unconditional purchase obligations of approximately $1.0 billion.These unconditional purchase obligations include agreements to purchase goods or services that areenforceable and legally binding on HP and that specify all significant terms, including: fixed orminimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximatetiming of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.These unconditional purchase obligations are principally related to cost of sales, inventory and otheritems.

Note 17: Litigation and Contingencies

Pending Litigation and Proceedings

Intergraph Hardware Technologies Company v. HP, Dell & Gateway is a lawsuit filed in United StatesDistrict Court for the Eastern District of Texas, Marshall County, on December 16, 2002. Gateway andDell are no longer defendants in this matter. The suit accuses HP of infringement of three patentsrelated to cache memory (the ‘‘Clipper Patents’’). Intergraph Hardware Technologies Company(‘‘Intergraph’’) seeks damages constituting a ‘‘reasonable royalty’’ (as well as enhanced damages), aninjunction, prejudgment interest, costs and attorneys’ fees. The complaint was served on HP on April 1,2003. On May 21, 2003, HP answered and counterclaimed for a declaratory judgment that the patentsare not infringed by HP and that the patents are invalid and unenforceable. Fact discovery closed onOctober 27, 2004. A claim construction hearing was held on May 7, 2004 and the court issued a rulingon the claim construction hearing on July 1, 2004. Jury selection is scheduled to begin on February 7,2005, and trial is scheduled to begin on February 21, 2005. Expert discovery is ongoing. On May 7,2004, Intergraph sued HP in United States District Court for the Eastern District of Texas, TylerCounty, for infringement of another patent related to cache memory management. Intergraph seeks aninjunction, declaratory relief and attorneys’ fees, but not damages. HP answered and counterclaimed,asserting Intergraph’s infringement of two HP software patents. HP seeks damages and an injunction.Trial in that matter is scheduled to begin on April 11, 2005 for Intergraph’s claims, and on October 24,2005 for HP’s claims. Intergraph has obtained significant settlements from other defendants, rangingfrom $10 million (Advanced Micro Devices) to $300 million (Intel Corporation), relating to suchdefendants’ direct use of the Clipper Patents. However, the ultimate resolution of these proceedings

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Note 17: Litigation and Contingencies (Continued)

and the financial impact on HP, which will depend in part on determinations as to the useful life of thepatents, what would constitute ‘‘reasonable royalty’’ rates, the allocation of any amounts paid foraccounting purposes, the timing of any payments and the units impacted, remains uncertain.

On May 28, 2003, HP sued Intergraph Corporation, the parent of Intergraph, in United StatesDistrict Court for the Northern District of California, San Francisco Division, accusing IntergraphCorporation of infringement of four HP patents related to computer-aided design, video displaytechnology and information retrieval technology. Intergraph answered and counterclaimed fordeclaratory relief on October 14, 2003. A claim construction hearing was held on October 22, 2004, andthe court subsequently issued its claim construction rulings. HP expects trial to begin in mid-2005. HPseeks damages, an injunction, prejudgment interest, costs and attorneys’ fees. On April 1, 2004, HPsued Intergraph Corporation in the Mannheim State Court in Mannheim, Germany, and relatedproceedings in Germany are pending, for infringement of two European Union patents related tocomputer-aided design. HP seeks damages, an injunction and costs. Trial took place in November 2004,and the court subsequently dismissed HP’s action based on a determination of Intergraph’snoninfringement. On April 19, 2004, HP sued Z/I Imaging, a subsidiary of Intergraph Corporation, andIntergraph Corporation, in United States District Court for the District of Delaware, accusing Z/IImaging of infringement of two patents related to image scanning technology. Intergraph answered andcounterclaimed for declaratory relief on May 28, 2004. Trial is scheduled to begin December 4, 2005.Also on April 19, 2004, HP sued Intergraph Corporation in United States District Court for theEastern District of Texas for infringement of one patent relating to computer-aided design. Intergraphanswered and counterclaimed for declaratory relief on May 13, 2004. Jury selection is expected to beginin December 2005. In both cases, HP seeks damages, an injunction, prejudgment interest, costs andattorneys’ fees.

Copyright levies. Proceedings are being pursued against HP in certain European Union (‘‘EU’’)member countries seeking to impose levies upon equipment (such as printers and multi-functiondevices) alleging that these devices enable producing private copies of copyrighted materials.

Two non-binding arbitration proceedings instituted in June 2001 and June 2002, respectively, werebrought in Germany before the arbitration board of the Patent and Trademark Office.VerwertungsGesellschaft Wort (‘‘VG Wort’’), a collection agency representing certain copyright holders,brought the proceedings against HP, which relate to whether and to what extent copyright levies shouldbe imposed in accordance with copyright laws implemented in Germany relating to multi-functiondevices and printers that allegedly enable the production of copies by private persons. The publishedtariffs on these devices in Germany range from 10 to 613.56 euros per unit. Non-binding proposalswere presented in the proceedings, both of which HP rejected. In May 2004, VG Wort filed a lawsuitagainst HP in the Stuttgart Civil Court in Stuttgart, Germany seeking levies on multi-function devices(‘‘MFDs’’). A decision in this matter subsequently was issued. The court held that HP is liable forpayments regarding photocopiers sold in Germany, but did not determine the exact amount payable perunit. The court further stated that HP should furnish information regarding the number of MFDs soldin Germany up to December 2001 and the number of copies per minute that various MFDs canproduce. Finally, the court held that a levy of a maximum of 1.5% of the price was due on the bundle‘‘LJ8150 MFP plus Scanner-Module C4166B,’’ and that the individual elements of this bundle were notpart of the claim. The deadline for filing an appeal of this decision is January 31, 2005. In July 2004,VG Wort filed a separate lawsuit against HP in the Stuttgart Civil Court seeking levies on printers. Adecision in this matter was subsequently issued. The court held that HP is liable for payments regarding

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Note 17: Litigation and Contingencies (Continued)

all printers using ASCII code sold in Germany, but did not determine the amount payable per unit.The court further stated that HP should furnish information regarding the number of printers sold inGermany since April 2001 and the number of copies per minute that various printers can produce. Thedeadline for filing an appeal of this decision is January 27, 2005. In September 2003, VG Wort filed alawsuit against Fujitsu Siemens Computer GmbH (‘‘FSC’’) in Munich State Court seeking levies onPCs. This is an industry test case in Germany, and HP has undertaken to be bound by a final decision.A decision in this matter subsequently was issued stating that PCs are subject to a levy and that FSCshould furnish information as to the number of PCs sold in Germany since January 1, 2001. Further,FSC must pay 12 euros plus compound interest for each PC sold in Germany from March 24, 2001.FSC has indicated that it will appeal the decision.

In April 2001, the Organization for the Collective Management of Works of Literature, theOrganization for the Collective Management of Works of Plastic Arts and their Applications, and theOrganization for the Collective Management and Protection of Intellectual Property of Photographersbrought five proceedings against HP Hellas and Compaq Computer E.P.E. in Greece relating towhether a levy of 2% should be payable upon computer products, including central processing units,monitors, keyboards, mice, diskettes, printers, scanners and related items in accordance with Greekcopyright law, before its amendment in September 2002. These proceedings are pending before theCourt of First Instance of Athens or before the Court of Appeal of Athens.

In April 1998, Auvibel s.c.r.l., a Belgian collection agency, filed an appeal of a judgment in HP’sfavor with the Court of Appeal in Brussels relating to a dispute as to whether and to what extentcopyright levies should be imposed upon CD-writers and CD media. The case has been removed fromthe court’s list of pending cases, without prejudice to the parties’ right to reinstate the matter.

The total levies due, if imposed, would be based upon the number of products sold, and theper-product amounts of the levies, which will vary. Some EU member countries that do not yet havelevies on digital devices are expected to implement similar legislation to enable them to extend existinglevy schemes, while some other EU member countries are expected to limit the scope of levy schemesand applicability in the digital hardware environment. HP, other companies and various industryassociations are opposing the extension of levies to the digital environment and advocatingcompensation to rights holders through digital rights management systems. Based on such opposition,HP’s assessments of the merits of various proceedings and HP’s estimates of the units impacted andlevies, HP has accrued amounts that it believes are adequate to address the matters described above.However, the ultimate resolution of these matters, including the number of units impacted, the amountof levies imposed in various jurisdictions and the availability of HP to recover such amounts throughincreased prices, remains uncertain.

Alvis v. HP is a nationwide defective product consumer class action that was filed in state court inJefferson County, Texas by a resident of Eastern Texas in April 2001. In February 2000, a similar suitcaptioned LaPray v. Compaq was filed in state court in Jefferson County, Texas. The basic allegation isthat HP and Compaq sold computers containing floppy disk controllers that fail to alert the user tocertain floppy disk controller errors. That failure is alleged to result in data loss or data corruption.The complaints in Alvis and LaPray seek injunctive relief, declaratory relief, unspecified damages andattorneys’ fees. In July 2001, a nationwide class was certified in the LaPray case, which the BeaumontCourt of Appeals affirmed in June 2002. In May 2004, the Texas Supreme Court reversed thecertification of the nationwide class in the LaPray case and remanded the case to the trial court. The

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trial court has not set a new class certification hearing. A class certification hearing was held on July 1,2003 in the Alvis case, and the court granted plaintiffs’ motion to certify a nationwide class action. HPfiled an appeal of that certification with the 9th Court of Appeals in Beaumont, Texas, which heardoral arguments on HP’s appeal and received a supplemental briefing based upon the LaPray opinionfrom the Texas Supreme Court. On August 31, 2004, the 9th Court of Appeals in Texas reversed thelower court’s decision certifying a nationwide class and remanded the case to the trial court. A classcertification hearing was held, and the court has notified the parties that it will certify a Texas-wideclass action for injunctive relief only. On June 4, 2003, Barrett v. HP and Grider v. Compaq were eachfiled in state court in Cleveland County, Oklahoma, with factual allegations similar to those in Alvisand LaPray. The complaints in Barrett and Grider seek, among other things, specific performance,declaratory relief, unspecified damages and attorneys’ fees. On November 5, 2003, the court heard HP’smotion to dismiss Barrett v. HP and Grider v. Compaq, which motion was subsequently denied. OnDecember 22, 2003, the court entered an order staying both the Barrett and Grider cases until theconclusions of the Alvis and LaPray actions. On July 28, 2004, the Court lifted the stay in Grider, buttook under advisement the plaintiff’s motion to lift the stay in Barrett. On November 5, 2004, Scott v.HP was filed in state court in San Joaquin County, California, with factual allegations similar to thosein Alvis and LaPray. The complaint in Scott seeks class certification, injunctive relief, unspecifieddamages (including punitive damages), restitution, costs and attorneys’ fees. In addition, the CivilDivision of the Department of Justice, the General Services Administration Office of Inspector Generaland other Federal agencies are conducting an investigation of allegations that HP and Compaq madeor caused to be made false claims for payment to the United States for computers known by HP andCompaq to contain defective parts or otherwise to perform in a defective manner relating to the samealleged floppy disk controller errors. HP agreed with the Department of Justice to extend the statute oflimitations on its investigation until June 6, 2005. HP is cooperating fully with this investigation.

On December 27, 2001, Cornell University and the Cornell Research Foundation, Inc. filed an actionagainst HP in United States District Court for the Northern District of New York alleging that HP’sPA-RISC 8000 family of microprocessors, and servers and workstations incorporating those processors,infringes a patent assigned to Cornell Research Foundation, Inc. that describes a way of executingmicroprocessor instructions. HP has answered and counterclaimed. This action seeks declaratory andinjunctive relief and unspecified damages. On March 26, 2004, the court issued a ruling interpreting thedisputed claims terms in the patent at issue. Discovery is ongoing, and no trial date has been set.

HP v. EMC Corporation (‘‘EMC’’) is a lawsuit filed in United States District Court for theNorthern District of California on September 30, 2002, in which HP accuses EMC of infringing sevenHP patents. HP seeks damages, an injunction, prejudgment interest, costs and attorneys’ fees. OnJuly 21, 2003, EMC filed its answer and a cross-claim asserting, among other things, that numerous HPstorage, server and printer products infringe six EMC patents. EMC seeks a permanent injunction aswell as unspecified monetary damages, costs and attorneys’ fees for patent infringement. The courtissued an order construing disputed claim terms on June 23, 2004. Discovery is ongoing. Trial isexpected in late 2005 or early 2006. Subsequently, HP filed a second lawsuit in United States DistrictCourt for the Northern District of California, in which HP accuses additional models of certain EMCproducts of infringing the same seven HP patents. HP seeks damages, an injunction, prejudgmentinterest, costs and attorneys’ fees. EMC also filed suit against StorageApps, a company acquired by HPin fiscal 2001, in United States District Court in Worcester, Massachusetts on October 20, 2000. Thesuit accused StorageApps of infringement of EMC patents relating to storage devices, and sought a

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permanent injunction as well as unspecified monetary damages for patent infringement. The court helda hearing to construe the disputed claims terms of EMC’s three patents in the suit on July 21-22, 2003and issued its claim construction ruling on September 12, 2003. Following a trial in May 2004, the juryfound that three of EMC’s patents are valid and infringed. The damages phase of the litigation hascommenced, and a trial on the issue of damages is scheduled to begin on February 17, 2005. HP isappealing the judgment of liability.

Neubauer, et al. v. Intel Corporation, Hewlett-Packard Company, et al. and Neubauer, et al. v. CompaqComputer Corporation are separate lawsuits filed on June 3, 2002 in state court in Madison County,Illinois, alleging that HP and Compaq (along with Intel) misled the public by suppressing andconcealing the alleged material fact that systems that use the Intel Pentium 4 processor are lesspowerful and slower than systems using the Intel Pentium III processor and processors made by acompetitor of Intel. The court in the HP action has certified an Illinois class as to Intel but denied anationwide class. The plaintiffs seek unspecified damages, restitution, attorneys’ fees and costs andcertification of a nationwide class against HP and Compaq. The class action certification hearingsagainst HP and Compaq have not been scheduled. In each action, HP and Compaq have filed motionsto dismiss the cases, which the court has denied. HP and Compaq also have filed forum nonconveniens motions, which are pending. Skold, et al. v. Intel Corporation and Hewlett-Packard Companyis a lawsuit in state court in Alameda County, California to which HP was joined on June 14, 2004,based upon factual allegations similar to those in the Neubauer cases. The plaintiffs seek unspecifieddamages, restitution, attorneys’ fees and cost and certification of nationwide class.

Forgent Networks v. HP et al. is a lawsuit filed on April 22, 2004 against HP as well as 30 othercompanies in United States District Court for the Eastern District of Texas. The complaint accuses HPof patent infringement with respect to HP’s products that implement JPEG compression. JPEG is astandard for data compression used in HP’s PCs, scanners, digital cameras, PDAs, and non-photo-printers. Forgent seeks unspecified damages, an injunction, interest, costs and attorneys’ fees.Separately, HP has alerted government regulators of Forgent’s participation in the JPEGstandardization process and current licensing activities. Trial has been set for October 2005.

Hewlett-Packard Development Company, LP v. Gateway, Inc. is a lawsuit filed on March 24, 2004 byHP’s wholly-owned subsidiary, Hewlett-Packard Development Company, LP (‘‘HPDC’’), againstGateway, Inc. in U.S. District Court in the Southern District of California, alleging infringement of sixpatents relating to various notebook, desktop and enterprise computer technologies. On April 2, 2004,HPDC filed an amended complaint, adding infringement allegations for four additional patents. HPDCseeks an injunction, unspecified monetary damages, interest and attorneys’ fees. On May 10, 2004,Gateway filed an answer and a counterclaim, alleging infringement of five Gateway patents relating tocomputerized television, wireless, computer monitoring and computer expansion card technologies.Gateway seeks an injunction, unspecified monetary damages, interest and attorneys’ fees. Claimconstruction is scheduled to begin on January 24-25, 2005. On May 6, 2004, HPDC and HP filed acomplaint with the U.S. International Trade Commission (‘‘ITC’’) against Gateway, alleginginfringement of seven additional computer technology patents. HP seeks an injunction. On October 21,2004, HPDC filed suit in the United States District Court for the Western District of Wisconsin againsteMachines, a wholly-owned subsidiary of Gateway, alleging infringement of five HPDC patents relatingto personal and desktop computers, of which three patents remain in suit. HPDC seeks an injunction,unspecified monetary damages, interest and attorneys’ fees.

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On July 2, 2004, Gateway filed a complaint with the ITC against HP, alleging infringement of threepatents relating to audio control, imaging and computerized television technologies. Gateway seeks aninjunction. Also on July 2, 2004, Amiga Development LLC (‘‘Amiga’’), an entity affiliated withGateway, filed a lawsuit against HP in the Eastern District of Texas, alleging infringement of threepatents relating to computer monitoring, imaging and decoder technologies. Gateway seeks aninjunction, unspecified monetary damages, interest and attorneys’ fees. HP and HPDC have answeredand counterclaimed, alleging infringement by Amiga and Gateway of four HPDC patents related topersonal computer technology. On August 18, 2004, Gateway filed a declaratory relief action againstHPDC in the United States District Court for the Southern District of California seeking a declarationof non-infringement and invalidity of the above-referenced four HPDC patents relating to personalcomputer technology. HPDC answered and counterclaimed and alleged infringement of the same fourpatents. HP seeks an injunction, unspecified monetary damages, interest and attorneys’ fees. Claimconstruction is scheduled to begin in January 2005.

Hanrahan v. Hewlett-Packard Company and Carleton Fiorina is a lawsuit filed on November 3, 2003,in the United States District Court for the District of Connecticut on behalf of a putative class ofpersons who sold common stock of HP during the period from September 4, 2001 throughNovember 5, 2001. The lawsuit seeks unspecified damages and generally alleges that HP andMs. Fiorina violated the federal securities laws by making statements during this period which weremisleading in failing to disclose that Walter B. Hewlett would oppose the proposed acquisition ofCompaq by HP prior to Mr. Hewlett’s disclosure of his opposition to the proposed transaction. Amotion to transfer the action to federal court in California is pending, and no lead plaintiff has yetbeen appointed.

Stevens v. HP (renamed as Erickson v. HP) is an unfair business practices consumer class actionfiled in the Superior Court of California in Riverside County on July 31, 2000. Consumer class actionlawsuits have been filed, in coordination with the original plaintiffs, in 33 additional jurisdictions. Thevarious plaintiffs throughout the country claim to have purchased different models of HP inkjetprinters. The basic factual allegation of these actions is that affected consumers who purchased HPprinters received half-full or ‘‘economy’’ ink cartridges instead of full cartridges. Plaintiffs claim thatHP’s advertising, packaging and marketing representations for the printers led the consumers to believethey would receive full cartridges. These actions seek injunctive relief, disgorgement of profits,compensatory damages, punitive damages and attorneys’ fees under various state unfair businesspractices statutes and common law claims of fraud and negligent misrepresentation. In the initialCalifornia matter, the court granted summary judgment in HP’s favor and denied class certification. InOctober of 2003, the California appellate court affirmed the lower court’s decisions and dismissedplaintiff’s appeal. The matter was certified as a class action in North Carolina state court, where it wasfiled as Hughes v. Hewlett-Packard Company. HP prevailed at the trial of this case, which concluded inSeptember 2003. The litigation is not in trial in other jurisdictions and the other cases have not beencertified as class actions. Plaintiffs’ counsel in all 33 jurisdictions have signed a dismissal agreement,which provides that all of the cases will be dismissed. Thus far twenty-one of the actions have beendismissed.

Digwamaje et al. v. Bank of America et al. is a purported class action lawsuit that names HP andnumerous other multinational corporations as defendants. It was filed on September 27, 2002 in UnitedStates District Court for the Southern District of New York on behalf of current and former South

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African citizens and their survivors who suffered violence and oppression under the apartheid regime.The lawsuit alleges that HP and other companies helped perpetuate, and profited from, the apartheidregime during the period from 1948-1994 by selling products and services to agencies of the SouthAfrican government. Claims are based on the Alien Tort Claims Act, the Torture Protection Act, theRacketeer Influenced and Corrupt Organizations Act and state law. The complaint seeks, among otherthings, an accounting, the creation of a historic commission, compensatory damages in excess of$200 billion, punitive damages in excess of $200 billion, costs and attorneys’ fees. The courtsubsequently dismissed the plaintiffs’ complaint, and plaintiffs have appealed the decision to the UnitedStates Court of Appeals for the Second Circuit.

In May 2002, the European Commission of the EU publicly stated that it was consideringconducting an investigation into OEM activities concerning the sales of printers and supplies toconsumers within the EU. The European Commission contacted HP requesting information on theprinting systems businesses. HP is cooperating fully with this inquiry.

In March 2003, the Korea Fair Trade Commission commenced an investigation of the Koreanprinting and supplies market. The Korea Fair Trade Commission contacted HP requesting informationon its printing systems business. A hearing is expected to be held in 2005. HP is cooperating fully withthis inquiry.

The Government of Canada conducted cost audits of certain contracts between Public Works andGovernment Services Canada (‘‘PWGSC’’) and each of Compaq Canada Corp. and Hewlett-Packard(Canada) Co. relating to services provided to the Canadian Department of National Defence (‘‘DND’’).Compaq Canada Corp. was combined with Hewlett-Packard (Canada) Co. following HP’s acquisition ofCompaq. HP cooperated fully with the audit and has conducted its own inquiry, sharing the results ofits investigation with PWGSC and DND. On May 14, 2004, HP announced that it had resolved thedispute with the Government of Canada. HP Canada agreed to reimburse the Government of Canadathe sum of CDN$146 million (approximately US$105 million), an amount determined by both partiesto be appropriate upon investigation. HP recorded $70 million in the second quarter of fiscal 2004 andhad recorded $35 million in the prior fiscal year. HP determined that it was important for HP to honorits contractual obligations, rather than engage in protracted litigation with the Government of Canada,despite the lack of evidence that HP employees derived any improper benefit from the complex schemedesigned to exploit both parties. HP has initiated proceedings to recover these funds from responsibleindividuals, and continues to consider further proceedings against others to recover additional funds.

HP is involved in lawsuits, claims, investigations and proceedings, including those identified above,consisting of intellectual property, commercial, securities, employment, employee benefits andenvironmental matters, which arise in the ordinary course of business. In accordance with SFAS No. 5,‘‘Accounting for Contingencies,’’ HP makes a provision for a liability when it is both probable that aliability has been incurred and the amount of the loss can be reasonably estimated. HP believes it hasadequate provisions for any such matters. HP reviews these provisions at least quarterly and adjuststhese provisions to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, andother information and events pertaining to a particular case. Based on its experience, HP believes thatany damage amounts claimed in the specific matters discussed above are not a meaningful indicator ofHP’s potential liability. Litigation is inherently unpredictable. However, HP believes that it has validdefenses with respect to legal matters pending against it. Nevertheless, it is possible that cash flows or

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results of operations could be materially affected in any particular period by the unfavorable resolutionof one or more of these contingencies.

Environmental

HP is party to, or otherwise involved in, proceedings brought by United States or stateenvironmental agencies under the Comprehensive Environmental Response, Compensation andLiability Act (‘‘CERCLA’’), known as ‘‘Superfund,’’ or state laws similar to CERCLA. HP is alsoconducting environmental investigations or remediations at several current or former operating sitespursuant to administrative orders or consent agreements with state environmental agencies. It is ourpolicy to apply strict standards for environmental protection to sites inside and outside the UnitedStates, even if not subject to regulations imposed by local governments. The liability for environmentalremediation and other environmental costs is accrued when it is considered probable and the costs canbe reasonably estimated. Historically, environmental costs have not been material to our operations orfinancial position.

Note 18: Segment Information

Description of Segments

HP is a leading global provider of products, technologies, solutions and services to individualconsumers and businesses. HP’s offerings span IT infrastructure and storage, personal computing andother access devices, multi-vendor services including maintenance, consulting and integration andoutsourcing, and imaging and printing.

During fiscal 2004, HP organized its operations into seven business segments: PSG, IPG, ESS,HPS, HP Financial Services (‘‘HPFS’’), Software, and Corporate Investments. Given the cross-segmentlinkages in our Adaptive Enterprise offering, and in order to capitalize on up-selling and cross-sellingopportunities, ESS, HPS and Software are structured beneath a broader Technology Solutions Group(‘‘TSG’’), in order to provide a supplementary view of HP’s business. HP’s organizational structure isbased on a number of factors that management uses to evaluate, view and run its business operationswhich include, but are not limited to, customer base, homogeneity of products and technology. Thebusiness segments disclosed in the Consolidated Financial Statements are based on this organizationalstructure and information reviewed by HP’s management to evaluate the business segment results. Atthe beginning of the first quarter of fiscal 2004, HP divided its Enterprise Systems Group into the ESSsegment and Software segment. Segment operating results for fiscal 2003 and 2002 have been restatedto reflect this organizational change as well as certain minor product reclassifications. Future changesto this organizational structure may result in changes to the business segments disclosed. A descriptionof the types of products and services provided by each business segment follows.

Technology Solutions Group’s mission is to coordinate HP’s Adaptive Enterprise offering acrossorganizations to create solutions that allow customers to manage and transform their business and ITenvironments. TSG allows HP to leverage the resources and capabilities of the HP portfolio byapplying key design principles consistently across business, application and infrastructure services with avision of standardization, simplification, modularity and integration. Each of the business segmentswithin TSG is described in detail below.

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• Enterprise Storage and Servers provides storage and server products. Business critical serversinclude Reduced Instruction Set Computing (RISC)-based servers running on the HP-UXoperating system, Itanium�(1)-based servers running on HP-UX, Windows�(2) and Linux and theHP AlphaServer product line running on both Tru64 UNIX�(3) and Open VMS. The variousserver offerings range from low-end servers to high-end scalable servers, including theSuperdome line. Additionally, HP offers its NonStop fault-tolerant server products for businesscritical solutions. Industry standard servers include primarily entry-level and mid-range ProLiantservers, which run primarily on the Windows, Linux and Novell operating systems, and HP’sBladeSystem family of blade servers. HP’s StorageWorks offerings include entry-level, mid-rangeand enterprise arrays, storage area networks (SANs), network attached storage, storagemanagement software and virtualization technologies, as well as tape drives, tape libraries andoptical archival storage.

• HP Services provides a portfolio of multi-vendor IT services including technology services,consulting and integration, and managed services. HPS also offers a variety of services tailoredto particular industries such as manufacturing, network and service providers. In collaborationwith ESS and Software, HPS teams with software and networking companies and local systemsintegrators to bring solutions to HP’s customers. Technology services (formerly called CustomerSupport) provides a range of technology services from standalone product support to highavailability services for complex, global, networked, multi-vendor environments. Technologyservices also manages the delivery of product warranty support through its own serviceorganization, as well as through authorized resellers. Consulting and integration services helpcustomers measure, assess and maintain the link between business and IT; design and integratethe customers’ environments into a more adaptive infrastructure; and align, extend and manageapplications and business processes. Consulting and integration provides cross-industry solutionsin areas such as supply chain, business portals, messaging and security. Managed services offersIT management services, including comprehensive outsourcing, transformational infrastructureservices, client computing managed services, managed web services, application services andbusiness process outsourcing, as well as business continuity and recovery services.

• Software provides management software solutions, including support, that allow enterprisecustomers to manage their infrastructure, operations, applications and business processes underthe HP OpenView brand. In addition, Software delivers a suite of comprehensive, carrier-gradeplatforms for developing and deploying next-generation voice, data and converged services tonetwork and service providers under the HP OpenCall brand.

• Personal Systems Group provides commercial PCs, consumer PCs, workstations, handheldcomputing devices, digital entertainment systems, calculators and other related accessories,software and services for commercial and consumer markets. Commercial PCs are optimized forcommercial uses, including enterprise and small and medium business customers, and forconnectivity and manageability in networked environments. Commercial PCs include the HPbusiness desktops and the HP Compaq business series, Evo notebook PCs and Compaq Tablet

(1) Itanium� is a registered trademark of Intel Corporation.(2) Windows� is a registered trademark of Microsoft Corporation.(3) UNIX� is a registered trademark of The Open Group.

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PCs. Consumer PCs are targeted at the home user and include the HP Pavilion and CompaqPresario series of multi-media consumer desktop PCs and notebook PCs, as well as HP MediaCenter PCs. Workstations are individual computing products designed for users demandingenhanced performance, such as computer animation, engineering design and other programsrequiring high resolution graphics. Workstations are provided for UNIX, Windows and Linux-based systems. Handheld computing devices include the iPAQ series of products ranging fromentry-level devices primarily used as organizers to advanced devices with biometric security andwireless capability, that run on Windows Mobile software. Digital entertainment products includeDVD+RW drives, the HP Movie Writer, the HP Digital Entertainment Center, plasma andLCD flat panel televisions and the Apple iPod�(4) from HP.

• Imaging and Printing Group provides home and business printing, imaging and publishing devicesand systems, digital imaging products and printer supplies. Home and business printing, imagingand publishing devices and systems include color and monochrome single-function printers forshared and personal use, printer- and copier-based multi-function devices, inkjet and laserall-in-one printers, wide- and large-format inkjet printers and digital presses. Digital imagingproducts include Photosmart printers, digital photography products and scanners. Printersupplies include laser and inkjet printer cartridges and other related printing media such asHP-branded Vivera ink and HP Premium and Premium Plus photo papers.

• HP Financial Services supports and enhances HP’s global product and services solutions,providing a broad range of value-added financial life cycle management services. HPFS enablesHP’s worldwide customers to acquire complete IT solutions, including hardware, software andservices. HPFS offers leasing, financing, utility programs, and asset recovery services, as well asfinancial asset management services, for large global and enterprise customers. HPFS alsoprovides an array of specialized financial services to small and medium-sized businesses andeducation and government entities. HPFS offers innovative, customized and flexible alternativesto balance unique customer cash flow, technology obsolescence and capacity needs.

• Corporate Investments is managed by the Office of Strategy and Technology and includes HPLabs and certain business incubation projects. Revenue in this segment is attributable to the saleof certain network infrastructure products that enhance computing and enterprise solutions aswell as the licensing of specific HP technology to third parties.

Segment Data

The results of the business segments are derived directly from HP’s internal management reportingsystem. The accounting policies used to derive business segment results are substantially the same asthose used by the consolidated company. Management measures the performance of each businesssegment based on several metrics, including earnings from operations. These results are used, in part,to evaluate the performance of, and to assign resources to, each of the business segments. Certainoperating expenses, which HP manages separately at the corporate level, are not allocated to thebusiness segments. These unallocated costs include primarily amortization of purchased intangibleassets, certain acquisition-related charges and charges for purchased IPR&D as well as certaincorporate governance costs.

(4) iPod� is a registered trademark of Apple Computer, Inc.

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Restructuring charges and any associated adjustments thereto related to restructuring actionsinitiated prior to fiscal 2004 are not allocated to the business segments.

Selected operating results information for each business segment, as well as for TSG, was asfollows for the fiscal years ended October 31:

Earnings (Loss) fromTotal Net Revenue Operations

2004 2003 2002 2004 2003 2002

In millions

Enterprise Storage and Servers . . . . . . . . . . . . . . . . . $15,152 $14,593 $10,402 $ 173 $ 142 $ (308)HP Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,778 12,357 9,052 1,263 1,362 891Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 922 774 703 (145) (190) (348)

Technology Solutions Group . . . . . . . . . . . . . . . . . . 29,852 27,724 20,157 1,291 1,314 235

Personal Systems Group . . . . . . . . . . . . . . . . . . . . . . 24,622 21,210 14,680 210 22 (236)Imaging and Printing Group . . . . . . . . . . . . . . . . . . . 24,199 22,569 20,358 3,847 3,596 3,365HP Financial Services . . . . . . . . . . . . . . . . . . . . . . . . 1,895 1,921 1,707 125 79 (134)Corporate Investments . . . . . . . . . . . . . . . . . . . . . . . 449 344 288 (178) (161) (232)

Segment total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $81,017 $73,768 $57,190 $5,295 $4,850 $2,998

The reconciliation of segment operating results information to HP consolidated totals was asfollows for the fiscal years ended October 31:

2004 2003 2002

In millions

Net revenue:Segment total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $81,017 $73,768 $57,190Elimination of intersegment net revenue and other . . . . . . . . . . . . . . . . (1,112) (707) (602)

Total HP consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $79,905 $73,061 $56,588

Earnings (loss) before taxes:Total segment earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,295 $ 4,850 $ 2,998Acquisition-related inventory write-downs . . . . . . . . . . . . . . . . . . . . . . . — — (147)Corporate and unallocated costs and eliminations . . . . . . . . . . . . . . . . . (260) (310) (187)Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (114) (800) (1,780)In-process research and development charges . . . . . . . . . . . . . . . . . . . . . (37) (1) (793)Acquisition-related charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (54) (280) (701)Amortization of purchased intangible assets . . . . . . . . . . . . . . . . . . . . . . (603) (563) (402)Interest and other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 21 52Gains (losses) on investments and early extinguishment of debt . . . . . . . 4 (29) (75)Dispute settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (70) — 14

Total HP consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,196 $ 2,888 $(1,021)

Assets are allocated to the business segments based on the primary segments benefiting from theassets. Certain assets, such as deferred tax assets, which cannot be directly attributable to a segment,

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are allocated based on certain drivers. Corporate and unallocated assets are composed primarily of cashand cash equivalents and short-term investments. As described above, fiscal 2004 segment assetinformation is stated based on the 2004 organizational structure. However, it is not practicable torestate fiscal 2003 and 2002 segment assets for these changes. Total assets by segment as well as forTSG and the reconciliation of segment assets to HP consolidated total assets was as follows atOctober 31:

2004 2003 2002

In millions

Enterprise Storage and Servers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,856 $ — $ —Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,422 — —

Enterprise Systems Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,278 15,038 15,555HP Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,619 12,700 12,436

Technology Solutions Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,897 $27,738 $27,991

Personal Systems Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,622 10,421 9,986Imaging and Printing Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,169 13,824 12,272HP Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,992 7,830 8,540Corporate Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375 228 129Corporate and unallocated assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,083 14,675 11,792

Total HP consolidated assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $76,138 $74,716 $70,710

Major Customers

No single customer represented 10% or more of HP’s total net revenue in any fiscal yearpresented.

Geographic Information

Net revenue, classified by the major geographic areas in which HP operates, was as follows for thefiscal years ended October 31:

2004 2003 2002

In millions

Net revenue:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,362 $29,218 $23,302Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,543 43,843 33,286

Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $79,905 $73,061 $56,588

Net revenue by geographic area is based upon the sales location which predominately representsthe customer location. No single country outside of the United States represented more than 10% ofHP’s total net revenue in any period presented. No single country outside of the United Statesrepresented 10% or more of HP’s total net assets in any period presented, with the exception of theNetherlands at October 31, 2004 and Belgium at October 31, 2003, respectively. No single countryoutside of the United States represented more than 10% of HP’s total net property, plant and

147

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 18: Segment Information (Continued)

equipment in any period presented. HP’s long-lived assets other than goodwill and purchased intangibleassets, which are not allocated to specific geographic locations as it is impracticable to do so, arecomposed principally of net property, plant and equipment.

Net property, plant and equipment, classified by major geographic areas in which HP operates, wasas follows at October 31:

2004 2003 2002

In millions

Net property, plant and equipment:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,648 $3,693 $4,158Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,001 2,789 2,766

Total net property, plant and equipment . . . . . . . . . . . . . . . . . . . . $6,649 $6,482 $6,924

Net revenue by similar products or services

Net revenue from products or services in each of the Software, HPFS* and Corporate Investmentssegments are similar. The following table provides net revenue for similar classes of products within theIPG, PSG, ESS and HPS segments for the fiscal years ended October 31:

2004 2003 2002

In millions

Printer hardware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,440* $ 9,086* $ 8,661*

Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,197* 12,004* 10,453*

Digital imaging and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,562 1,479 1,244

Imaging and Printing Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,199 $22,569 $20,358

Desktop personal computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,168* $12,503* $ 9,293*

Notebook personal computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,422* 6,922 4,050Workstations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,018 923 763Personal appliances and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,014 862 574

Personal Systems Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,622 $21,210 $14,680

Servers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,884* $11,095* $ 7,626*

Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,268 3,498 2,776

Enterprise Storage and Servers . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,152 $14,593 $10,402

Technology services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,673* $ 8,018* $ 5,850*

Managed services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,590 1,873 1,073Consulting and integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,515 2,466 2,129

HP Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,778 $12,357 $ 9,052

* Denotes that net revenue for the class of products or services equaled or exceeded 10% of HP’sconsolidated net revenue for the fiscal year or, in the case of HPFS, for all fiscal years presented.

148

HEWLETT-PACKARD COMPANY AND SUBSIDIARIESQuarterly Summary

(Unaudited)

Three-month periods ended

January 31 April 30 July 31 October 31

In millions, except per share amounts2004Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,514 $20,113 $18,889 $21,389Cost of sales(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,564 15,045 14,443 16,288Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 875 910 862 859Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,719 2,816 2,738 2,751Amortization of purchased intangible assets . . . . . . . . . . . . . . . . . . . . . . 144 148 146 165Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 38 9 13Acquisition-related charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 9 6 24In-process research and development charges . . . . . . . . . . . . . . . . . . . . . — 9 28 —Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,371 18,975 18,232 20,100Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,143 1,138 657 1,289Interest and other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2 20 2Gains (losses) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (5) 1 (1)Dispute settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (70) — —Earnings before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,163 1,065 678 1,290Provision for taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 181 92 199Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 936 884 586 1,091Net earnings per share:(2)

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.31 $ 0.29 $ 0.19 $ 0.37Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.30 $ 0.29 $ 0.19 $ 0.37

Cash dividends paid per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.08 $ 0.08 $ 0.08 $ 0.08Range of per share closing stock prices on the New York Stock Exchange and

Nasdaq Stock Market:Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21.28 $ 19.70 $ 19.50 $ 16.50High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26.12 $ 24.12 $ 22.00 $ 20.50

2003(3)

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,877 $17,983 $17,348 $19,853Cost of sales(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,141 13,103 12,810 14,804Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 908 941 895 907Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,725 2,795 2,785 2,707Amortization of purchased intangible assets . . . . . . . . . . . . . . . . . . . . . . 138 141 141 143Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 234 376 190Acquisition-related charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 126 40 28In-process research and development charges . . . . . . . . . . . . . . . . . . . . . — — — 1Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,998 17,340 17,047 18,780Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 879 643 301 1,073Interest and other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 (20) 10 (20)Gains (losses) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) (12) (24) 12Earnings before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 925 611 287 1,065Provision for (benefit from) taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204 (48) (10) 203Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 721 659 297 862Net earnings per share:(2)

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.24 $ 0.22 $ 0.10 $ 0.28Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.24 $ 0.22 $ 0.10 $ 0.28

Cash dividends paid per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.08 $ 0.08 $ 0.08 $ 0.08Range of per share closing stock prices on the New York Stock Exchange and

Nasdaq Stock Market:Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14.85 $ 15.00 $ 16.55 $ 19.26High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20.85 $ 18.44 $ 23.52 $ 22.31

(1) Cost of products, cost of services and financing interest.

(2) EPS for each quarter is computed using the weighted-average number of shares outstanding during that quarter, while EPSfor the fiscal year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum ofthe EPS for each of the four quarters may not equal the EPS for the fiscal year.

(3) Certain reclassifications have been made in order to conform to the fiscal 2004 presentation.

149

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

ITEM 9A. Controls and Procedures.

Under the supervision and with the participation of our management, including our principalexecutive officer and principal financial officer, we conducted an evaluation of the effectiveness of thedesign and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period coveredby this report (the ‘‘Evaluation Date’’). Based on this evaluation, our principal executive officer andprincipal financial officer concluded as of the Evaluation Date that our disclosure controls andprocedures were effective such that the information relating to HP, including our consolidatedsubsidiaries, required to be disclosed in our Securities and Exchange Commission (‘‘SEC’’) reports (i) isrecorded, processed, summarized and reported within the time periods specified in SEC rules andforms, and (ii) is accumulated and communicated to HP’s management, including our principalexecutive officer and principal financial officer, as appropriate to allow timely decisions regardingrequired disclosure.

HP will be required by the Sarbanes-Oxley Act to include an assessment of its internal control overfinancial reporting and attestation from an independent registered public accounting firm in its AnnualReport on Form 10-K beginning with its filing for its fiscal year ended October 31, 2005.

ITEM 9B. Other Information.

Not applicable.

150

PART III

ITEM 10. Directors and Executive Officers of the Registrant.

The names of the executive officers of HP and their ages, titles and biographies as of the datehereof are incorporated by reference from Part I, Item 1, above.

The following information is included in HP’s Notice of Annual Meeting of Shareowners andProxy Statement to be filed within 120 days after HP’s fiscal year end of October 31, 2004 (the ‘‘ProxyStatement’’) and is incorporated herein by reference:

• Information regarding directors of HP who are standing for reelection is set forth under‘‘Election of Directors’’

• Information regarding HP’s Audit Committee and designated ‘‘audit committee financialexperts’’ is set forth under ‘‘Corporate Governance Principles and Board Matters, BoardStructure and Committee Composition—Audit Committee’’

• Information on HP’s code of business conduct and ethics for directors, officers and employees,also known as the ‘‘Standards of Business Conduct,’’ and on HP’s Corporate GovernanceGuidelines is set forth under ‘‘Corporate Governance Principles and Board Matters’’

• Information regarding Section 16(a) beneficial ownership reporting compliance is set forth under‘‘Common Stock Ownership of Certain Beneficial Owners and Management—Section 16(a)Beneficial Ownership Compliance’’

ITEM 11. Executive Compensation.

Information regarding HP’s compensation of its named executive officers is set forth under‘‘Executive Compensation’’ in the Proxy Statement, which information is incorporated herein byreference. Information regarding HP’s compensation of its directors is set forth under ‘‘DirectorCompensation and Stock Ownership Guidelines’’ in the Proxy Statement, which information isincorporated herein by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management.

Information regarding security ownership of certain beneficial owners, directors and executiveofficers is set forth under ‘‘Common Stock Ownership of Certain Beneficial Owners and Management’’in the Proxy Statement, which information is incorporated herein by reference.

Information regarding HP’s equity compensation plans, including both stockholder approved plansand non-stockholder approved plans, is set forth in the section entitled ‘‘Executive Compensation—Equity Compensation Plan Information’’ in the Proxy Statement, which information is incorporatedherein by reference.

ITEM 13. Certain Relationships and Related Transactions.

Information regarding certain relationships and related transactions is set forth under ‘‘CertainRelationships and Related Transactions’’ in the Proxy Statement, which information is incorporatedherein by reference.

ITEM 14. Principal Accountant Fees and Services.

Information regarding principal auditor fees and services is set forth under ‘‘Principal AccountantFees and Services’’ in the Proxy Statement, which information is incorporated herein by reference.

151

PART IV

ITEM 15. Exhibits, Financial Statement Schedules.

(a) The following documents are filed as part of this report:

1. All Financial Statements:

The following financial statements are filed as part of this report under Item 8—‘‘FinancialStatements and Supplementary Data.’’

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . 83Statement of Management Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89Quarterly Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

2. Financial Statement Schedules:

Schedule II—Valuation and Qualifying Accounts for the three fiscal years ended October 31, 2004.

All other schedules are omitted as the required information is inapplicable or the information ispresented in the Consolidated Financial Statements and notes thereto in Item 8 above.

3. Exhibits:

A list of exhibits filed or furnished with this report on Form 10-K (or incorporated by reference toexhibits previously filed or furnished by HP) is provided in the Exhibit Index on page 156 of thisreport. HP shall furnish copies of exhibits for a reasonable fee (covering the expense of furnishingcopies) upon request. Stockholders may request exhibits copies by contacting:

Hewlett-Packard CompanyAttn: Investor Relations3000 Hanover StreetPalo Alto, CA 94304(866) GET-HPQ1 or (866) 438-4771

152

Schedule II

HEWLETT-PACKARD COMPANY AND SUBSIDIARIESValuation and Qualifying Accounts

For the fiscal years ended October 31

2004 2003 2002

In millions

Allowance for doubtful accounts—accounts receivable:Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . $ 347 $ 410 $ 275Amount acquired through acquisition . . . . . . . . . . . . . . . . . . . 9 — 141(Reversal) addition of bad debt provision . . . . . . . . . . . . . . . . (6) 29 90Deductions, net of recoveries . . . . . . . . . . . . . . . . . . . . . . . . . (64) (92) (96)

Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 286 $ 347 $ 410

Allowance for doubtful accounts—financing receivables:Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . $ 210 $ 270 $ 147Amount acquired through acquisition . . . . . . . . . . . . . . . . . . . — — 97Additions to allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 73 209Deductions, net of recoveries . . . . . . . . . . . . . . . . . . . . . . . . . (101) (133) (183)

Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 213 $ 210 $ 270

153

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

Date: January 14, 2005 HEWLETT-PACKARD COMPANY

By: /s/ CHARLES N. CHARNAS

Charles N. CharnasVice President, Deputy General Counsel and

Assistant Secretary

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appearsbelow constitutes and appoints Ann O. Baskins and Charles N. Charnas, or either of them, his or herattorneys-in-fact, for such person in any and all capacities, to sign any amendments to this report andto file the same, with exhibits thereto, and other documents in connection therewith, with the Securitiesand Exchange Commission, hereby ratifying and confirming all that either of said attorneys-in-fact, orsubstitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signedbelow by the following persons on behalf of the registrant and in the capacities and on the datesindicated.

Signature Title(s) Date

/s/ CARLETON S. FIORINA Chairman and Chief Executive Officer January 14, 2005(Principal Executive Officer)Carleton S. Fiorina

/s/ ROBERT P. WAYMAN Executive Vice President and Chief January 14, 2005Financial Officer (Principal FinancialRobert P. WaymanOfficer)

/s/ JON E. FLAXMAN Senior Vice President and Controller January 14, 2005(Principal Accounting Officer)Jon E. Flaxman

/s/ LAWRENCE T. BABBIO, JR. Director January 14, 2005

Lawrence T. Babbio, Jr.

/s/ PATRICIA C. DUNN Director January 14, 2005

Patricia C. Dunn

/s/ RICHARD A. HACKBORN Director January 14, 2005

Richard A. Hackborn

/s/ GEORGE A. KEYWORTH II Director January 14, 2005

George A. Keyworth II

/s/ ROBERT E. KNOWLING, JR. Director January 14, 2005

Robert E. Knowling, Jr.

154

Signature Title(s) Date

/s/ SANFORD M. LITVACK Director January 14, 2005

Sanford M. Litvack

/s/ ROBERT L. RYAN Director January 14, 2005

Robert L. Ryan

/s/ LUCILLE S. SALHANY Director January 14, 2005

Lucille S. Salhany

155

HEWLETT-PACKARD COMPANY AND SUBSIDIARIESEXHIBIT INDEX

Incorporated by ReferenceExhibitNumber Exhibit Description Form File No. Exhibit(s) Filing Date

2(a) Agreement and Plan of Reorganization 8-K 001-04423 2.1 September 4, 2001by and among Hewlett-PackardCompany, Heloise Merger Corporationand Compaq Computer Corporation.

3(a) Registrant’s Certificate of 10-Q 001-04423 3(a) June 12, 1998Incorporation.

3(b) Registrant’s Amendment to the 10-Q 001-04423 3(b) March 16, 2001Certificate of Incorporation.

3(c) Registrant’s Amended and Restated 10-Q 001-04423 3(c) June 9, 2004By-Laws effective March 17, 2004.

4(a) Indenture dated as of October 14, S-3 333-44113 4.2 January 12, 19981997 among Registrant and ChaseTrust Company of California regardingLiquid Yield Option Notes due 2017.

4(b) Supplemental Indenture dated as of 10-Q 001-04423 4(b) September 12, 2000March 16, 2000 to Indenture dated asof October 14, 1997 among Registrantand Chase Trust Company ofCalifornia regarding Liquid YieldOption Notes due 2017.

4(c) Second Supplemental Indenture to 10-Q 001-04423 4(c) September 10, 2004Indenture dated as of October 14,1997 among Registrant and J.P.Morgan Trust Company (as successorto Chase Trust Company of California)regarding Liquid Yield Option Notesdue 2017.

4(d) Form of Registrant’s 7.15% Global 8-K 001-04423 4.1 and 4.3 June 15, 2000notes due June 15, 2005, and relatedOfficers’ Certificate.

4(e) Form of Senior Indenture. S-3 333-30786 4.1 March 17, 2000

4(f) Form of Registrant’s Fixed Rate Note 8-K 001-04423 4.1, 4.2 May 24, 2001and Floating Rate Note and related and 4.4Officers’ Certificate.

4(g) Form of Registrant’s 5.75% Global 8-K 001-04423 4.1 and 4.2 December 7, 2001Note due December 15, 2006, andrelated Officers’ Certificate.

4(h) Form of Registrant’s 5.50% Global 8-K 001-04423 4.1 and 4.3 June 27, 2002Note due July 1, 2007, and form ofrelated Officers’ Certificate.

156

Incorporated by ReferenceExhibitNumber Exhibit Description Form File No. Exhibit(s) Filing Date

4(i) Form of Registrant’s 6.50% Global 8-K 001-04423 4.2 and 4.3 June 27, 2002Note due July 1, 2012, and form ofrelated Officers’ Certificate.

4(j) Form of Registrant’s Fixed Rate Note 8-K 001-04423 4.1 and 4.2 December 11, 2002and form of Floating Rate Note.

4(k) Form of Registrant’s 3.625% Global 8-K 001-04423 4.1 and 4.2 March 14, 2003Note due March 15, 2008, and relatedOfficers’ Certificate.

5-9 Not applicable.

10(a) Registrant’s 2004 Stock Incentive S-8 333-114253 4.1 April 7, 2004Plan.*

10(b) Registrant’s 2000 Stock Plan, amended 10-K 001-04423 10(a) January 21, 2003and restated effective November 21,2002.*

10(c) Registrant’s 1997 Director Stock Plan,amended and restated effectiveNovember 18, 2004.*‡

10(d) Registrant’s 1995 Incentive Stock Plan, 10-K 001-04423 10(c) January 21, 2003amended and restated effectiveNovember 21, 2002.*

10(e) Registrant’s 1990 Incentive Stock Plan, 10-K 001-04423 10(d) January 21, 2003amended and restated effectiveNovember 21, 2002.*

10(f) Registrant’s 1987 Director Option S-8 33-30769 4 August 31, 1989Plan.*

10(g) Amendment of Registrant’s 1987Director Option Plan, effectiveJuly 17, 1991.*‡

10(h) Compaq Computer Corporation 2001 10-K 001-04423 10(f) January 21, 2003Stock Option Plan, amended andrestated effective November 21, 2002.*

10(i) Compaq Computer Corporation 1998 10-K 001-04423 10(g) January 21, 2003Stock Option Plan, amended andrestated effective November 21, 2002.*

10(j) Compaq Computer Corporation 1995 10-K 001-04423 10(h) January 21, 2003Equity Incentive Plan, amended andrestated effective November 21, 2002.*

10(k) Compaq Computer Corporation 1989 10-K 001-04423 10(i) January 21, 2003Equity Incentive Plan, amended andrestated effective November 21, 2002.*

10(l) Compaq Computer Corporation 1985 10-K 001-04423 10(k) January 21, 2003Stock Option Plan, amended andrestated effective November 21, 2002.*

157

Incorporated by ReferenceExhibitNumber Exhibit Description Form File No. Exhibit(s) Filing Date

10(m) Compaq Computer Corporation 1985 10-K 001-04423 10(l) January 21, 2003Executive and Key Employee StockOption Plan, amended and restatedeffective November 21, 2002.*

10(n) Compaq Computer Corporation 1985 10-K 001-04423 10(m) January 21, 2003Nonqualified Stock Option Plan,amended and restated effectiveNovember 21, 2002.*

10(o) Compaq Computer Corporation 1985 S-3 333-86378 10.5 April 18, 2002Nonqualified Stock Option Plan forNon-Employee Directors.*

10(p) Amendment of Compaq Computer S-3 333-86378 10.11 April 18, 2002Corporation Non-Qualified StockOption Plan for Non-EmployeeDirectors, effective September 3,2001.*

10(q) Compaq Computer Corporation 1998 S-3 333-86378 10.9 April 18, 2002Former Nonemployee ReplacementOption Plan.*

10(r) Registrant’s Excess Benefit Retirement 10-Q 001-04423 10(c) September 12, 2000Plan, amended and restated as ofNovember 1, 1999.*

10(s) First Amendment to Registrant’s 10-K 001-04423 10(b)(b) January 21, 2003Excess Benefit Retirement Plan,effective November 1, 1999.*

10(t) Second Amendment to Registrant’s 10-Q 001-04423 10(t) June 9, 2004Excess Benefit Retirement Plan,effective April 1, 2004.*

10(u) Third Amendment to Registrant’s 10-Q 001-04423 10(u) June 9, 2004Excess Benefit Retirement Plan,effective May 1, 2004.*

10(v) Hewlett-Packard Company Cash 10-K 001-04423 10(c)(c) January 21, 2003Account Pension Restoration Plan.*

10(w) Registrant’s Executive Pay-for-Results 10-Q 001-04423 10(c)(c) March 11, 2004Plan, amended and restated effectiveNovember 1, 2003.*

10(x) Registrant’s Executive DeferredCompensation Plan, amended andrestated effective October 1, 2004.*‡

10(y) Employment Agreement, dated 10-Q 001-04423 10(g)(g) September 20, 1999July 17, 1999, between Registrant andCarleton S. Fiorina.*

158

Incorporated by ReferenceExhibitNumber Exhibit Description Form File No. Exhibit(s) Filing Date

10(z) Incentive Stock Plan Stock Option 10-Q 001-04423 10(i)(i) September 20, 1999Agreement (Non-Qualified), datedJuly 17, 1999, between Registrant andCarleton S. Fiorina.*

10(a)(a) Restricted Stock Agreement, dated 10-Q 001-04423 10(j)(j) September 20, 1999July 17, 1999, between Registrant andCarleton S. Fiorina.*

10(b)(b) Restricted Stock Unit Agreement, 10-Q 001-04423 10(k)(k) September 20, 1999dated July 17, 1999, betweenRegistrant and Carleton S. Fiorina.*

10(c)(c) Amended Employment Agreement,dated October 4, 2004, betweenRegistrant and Michael J. Winkler.*‡

10(d)(d) Registrant’s Severance Plan for 10-K 001-04423 10(z)(z) January 20, 2004Executive Officers.*

10(e)(e) Registrant’s Executive Severance 10-Q 001-04423 10(u)(u) June 13, 2002Agreement.*

10(f)(f) Registrant’s Executive Officers 10-Q 001-04423 10(v)(v) June 13, 2002Severance Agreement.*

10(g)(g) Form of Indemnity Agreement 10-Q 001-04423 10(x)(x) June 13, 2002between Compaq ComputerCorporation and its executive officers.*

10(h)(h) Registrant’s Service Anniversary Stock 10-Q 001-04423 10(p)(p) September 11, 2003Plan, as amended and restatedeffective July 17, 2003.*

10(i)(i) Form of Stock Option Agreement for 10-Q 001-04423 10(l)(l) June 9, 2004Registrant’s 2004 Stock Incentive Plan,Registrant’s 2000 Stock Plan, asamended, Registrant’s 1995 IncentiveStock Plan, as amended, the CompaqComputer Corporation 2001 StockOption Plan, as amended, the CompaqComputer Corporation 1998 StockOption Plan, as amended, the CompaqComputer Corporation 1995 EquityIncentive Plan, as amended and theCompaq Computer Corporation 1989Equity Incentive Plan, as amended.*

10(j)(j) Form of Restricted Stock Agreementfor Registrant’s 2004 Stock IncentivePlan, Registrant’s 2000 Stock Plan, asamended, and Registrant’s 1995Incentive Stock Plan, as amended.*‡

159

Incorporated by ReferenceExhibitNumber Exhibit Description Form File No. Exhibit(s) Filing Date

10(k)(k) Form of Restricted Stock UnitAgreement for Registrant’s 2004 StockIncentive Plan.*‡

10(l)(l) Form of Stock Option Agreement for 10-K 001-04423 10(e) January 27, 2000Registrant’s 1990 Incentive StockOption Plan, as amended.*

10(m)(m) Form of Common Stock Payment 10-Q 001-04423 10(p)(p) June 9, 2004Agreement and Option Agreement forRegistrant’s 1997 Director Stock Plan,as amended.*

10(n)(n) Form of Stock Option Agreement forRegistrant’s 1987 Director OptionPlan, as amended.*‡

10(o)(o) Form of Restricted Stock Grant Notice 10-Q 001-04423 10(w)(w) June 13, 2002for the Compaq ComputerCorporation 1989 Equity IncentivePlan.*

10(p)(p) Form of Stock Option Agreement for 10-K 001-04423 10(z)(z) January 21, 2003the Compaq Computer Corporation1985 Stock Option Plan, as amended.*

10(q)(q) Form of Stock Option Agreement for 10-K 001-04423 10(a)(1) January 21, 2003the Compaq Computer Corporation1985 Nonqualified Stock Option Plan,as amended.*

10(r)(r) Forms of Stock Option Notice for theCompaq Computer Corporation Non-Qualified Stock Option Plan for Non-Employee Directors, as amended.*‡

10(s)(s) Form of Stock Option Agreement forthe Compaq Computer Corporation1985 Executive and Key EmployeeStock Option Plan, as amended.*‡

10(t)(t) Form of Long-Term Performance CashAward Agreement for Registrant’s2004 Stock Incentive Plan andRegistrant’s 2000 Stock Plan, asamended.*‡

11 Not applicable.

12 Statement of Computation of Ratio ofEarnings to Fixed Charges.‡

13-16 Not applicable.

18 Not applicable.

21 Subsidiaries of Registrant as ofOctober 31, 2004.‡

160

Incorporated by ReferenceExhibitNumber Exhibit Description Form File No. Exhibit(s) Filing Date

22 None.

23 Consent of Independent RegisteredPublic Accounting Firm.‡

24 Power of Attorney (see signature page)of this Annual Report on Form 10-Kand incorporated herein by reference.

25-26 Not applicable.

31.1 Certification of Chief ExecutiveOfficer pursuant to Rule 13a-14(a) andRule 15d-14(a) of the SecuritiesExchange Act, as amended.‡

31.2 Certification of Chief Financial Officerpursuant to Rule 13a-14(a) andRule 15d-14(a) of the SecuritiesExchange Act of 1934, as amended.‡

32 Certification of Chief ExecutiveOfficer and Chief Financial Officerpursuant to 18 U.S.C. 1350, as adoptedpursuant to Section 906 of theSarbanes-Oxley Act of 2002.†

* Indicates management contract or compensatory plan, contract or arrangement.‡ Filed herewith.† Furnished herewith.

The registrant agrees to furnish to the Commission supplementally upon request a copy of (1) anyinstrument with respect to long-term debt not filed herewith as to which the total amount of securitiesauthorized thereunder does not exceed 10 percent of the total assets of the registrant and itssubsidiaries on a consolidated basis and (2) any omitted schedules to any material plan of acquisition,disposition or reorganization set forth above.

161

Exhibit 12

HEWLETT-PACKARD COMPANY AND SUBSIDIARIESStatements of Computation of Ratio of Earnings to Fixed Charges(1)

Fiscal Years Ended October 31,

2004 2003 2002 2001 2000

In millions, except ratios

Earnings (loss) from continuing operations:Earnings (loss) from continuing operations before

cumulative effect of change in accounting principleand taxes(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,196 $2,888 $(1,021) $ 791 $4,625

Adjustments:Minority interest in the income of subsidiaries with

fixed charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 15 7 10 4Undistributed (earnings) loss of equity method

investees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) 22 46 (30) (52)Fixed charges from continuing operations . . . . . . . . . 687 710 439 440 398

$4,893 $3,635 $ (529) $1,211 $4,975

Fixed charges from continuing operations:Total interest expense, including interest expense on

borrowings, amortization of debt discount andpremium on all indebtedness and other . . . . . . . . . . $ 257 $ 304 $ 255 $ 285 $ 257

Interest included in rent . . . . . . . . . . . . . . . . . . . . . . . 430 406 184 155 141

Total fixed charges from continuing operations . . . . . . . . $ 687 $ 710 $ 439 $ 440 $ 398

Ratio of earnings to fixed charges (excess of fixed chargesover earnings) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1x 5.1x $ (968) 2.8x 12.5x

(1) We computed the ratio of earnings to fixed charges by dividing earnings (earnings from continuingoperations before cumulative effect of change in accounting principle and taxes, adjusted for fixedcharges from continuing operations, minority interest in the income of subsidiaries with fixedcharges and undistributed earnings or loss of equity method investees) by fixed charges fromcontinuing operations for the periods indicated. Fixed charges from continuing operations include(i) interest expense on borrowings and amortization of debt discount or premium on allindebtedness and other, and (ii) a reasonable approximation of the interest factor deemed to beincluded in rental expense.

(2) We restated earnings (loss) from continuing operations before cumulative effect of change inaccounting principle and taxes for the effects of adopting SFAS No. 145 ‘‘Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.’’HP adopted SFAS No. 145 effective November 1, 2002 and reclassified the gains on the earlyextinguishment of its debt and related income taxes that were previously recorded in theConsolidated Statement of Operations as an extraordinary item to gains (losses) on investmentsand early extinguishment of debt and provision for (benefit from) taxes, respectively.

Exhibit 21

Subsidiaries of Hewlett-Packard Company

The registrant’s principal subsidiaries and affiliates as of October 31, 2004, are listed below.

ARGENTINA

—Hewlett-Packard Argentina S.R.L.

—HP Financial Services Argentina S.R.L.

AUSTRALIA

—Hewlett-Packard Australia Pty. Ltd.

—HP Financial Services (Australia) Pty. Ltd.

AUSTRIA

—Hewlett-Packard CRS (Austria) GmbH

—Hewlett-Packard Ges.m.b.H.

BELGIUM

—Hewlett-Packard Belgium S.P.R.L./B.V.B.A.

—Hewlett-Packard Coordination Center S.C.R.L./C.V.B.A.

—HP Financial Services SPRL

BRAZIL

—Hewlett-Packard Brasil Ltda.

—Hewlett-Packard Computadores Ltda.

—HP Financial Services Arrendamento Mercantil S.A.

BULGARIA

—Hewlett-Packard Bulgaria EooD

CANADA

—Hewlett-Packard (Canada) Co.

—Hewlett-Packard Financial Services Canada Company

CAYMAN ISLANDS

—Hewlett-Packard Equity Investments Limited

—Hewlett-Packard West Indies Limited

CHILE

—Hewlett-Packard Chile, Comercial Ltda.

—HP Financial Services (Chile) Ltda.

CHINA

—Hewlett-Packard Leasing Limited

—Hewlett-Packard Technology (Shanghai) Co. Ltd.

—Hewlett-Packard Trading (Shanghai) Co. Ltd.

—China Hewlett-Packard Company Limited

—Shanghai Hewlett-Packard Co., Ltd.

COLOMBIA

—Hewlett-Packard Colombia Ltda.

COSTA RICA

—Hewlett-Packard Costa Rica Ltda.

CROATIA

—Hewlett-Packard d.o.o.

CZECH REPUBLIC

—Hewlett-Packard s.r.o.

DENMARK

—Hewlett-Packard ApS

—HP CRS (Denmark) ApS

ECUADOR

—Hewlett-Packard Ecuador CIA Ltda.

EGYPT

—Hewlett-Packard (Egypt) Ltd.

FINLAND

—Hewlett-Packard OY

—HP CRS (Finland) OY

FRANCE

—Hewlett-Packard Centre de Competence SAS

—Hewlett-Packard France SAS

—HP CRS (France) SAS

—Technologies et Participations SAS

GERMANY

—Hewlett-Packard Europa Holding GmbH & Co. KG

—Hewlett-Packard GmbH

—HP Financial Services GmbH

—Triaton GmbH

GREECE

—Hewlett-Packard Hellas EPE

HONG KONG

—Hewlett-Packard AP (Hong Kong) Limited

—HP Financial Services (Hong Kong) Limited

HUNGARY

—Hewlett-Packard Magyarorszag Kft

—Hewlett-Packard Technology Licenses & Licensing Ltd.

INDIA

—Hewlett-Packard Financial Services (India) Private Limited

—Hewlett-Packard India Sales Private Limited

—Hewlett-Packard Globalsoft Limited

INDONESIA

—PT Hewlett-Packard Berca Servisindo

—PT Hewlett-Packard Finance Indonesia

IRELAND

—Hewlett-Packard Financial Services Company (Ireland)

—Hewlett-Packard Ireland Ltd.

—Hewlett-Packard (Manufacturing) Ltd.

ISLE OF MAN

—Hewlett-Packard Isle of Man, Ltd.

ISRAEL

—Hewlett-Packard Indigo Ltd.

ITALY

—Hewlett-Packard Italiana S.r.l.

—HPFS Rental S.R.L.

JAPAN

—Hewlett-Packard Japan, Ltd.

—HP Financial Services (Japan) K.K.

KOREA

—Hewlett-Packard Korea Ltd.

—HP Financial Services Company (Korea)

LATVIA

—Hewlett-Packard SIA

LITHUANIA

—UAB Hewlett-Packard

MALAYSIA

—Hewlett-Packard (M) Sdn. Bhd.

—HP Facilities Services (Malaysia) Sdn. Bhd.

MEXICO

—Hewlett-Packard Mexico, S. de R.L. de C.V.

MOROCCO

—Hewlett-Packard SARL

NETHERLANDS

—Hewlett-Packard Caribe B.V.

—Hewlett-Packard Europe B.V.

—Hewlett-Packard Indigo B.V.

—Hewlett-Packard Nederland B.V.

—Hewlett-Packard Products C.V.

—HP Financial Services Netherlands B.V.

—Compaq Trademark B.V.

NETHERLANDS ANTILLES

—Hewlett-Packard Finance N.V.

NEW ZEALAND

—Hewlett-Packard New Zealand

—HP Financial Services (New Zealand)

NIGERIA

—Hewlett-Packard Nigeria Ltd.

NORWAY

—Hewlett-Packard Norge A/S

—HP CRS (Norway) A/S

PERU

—Hewlett-Packard Peru, S.R.L.

PHILIPPINES

—Hewlett-Packard Philippines Corporation

POLAND

—Hewlett-Packard Polska Spool z o.o.

—HP Financial Services Poland Sp.Z.o.o.

PORTUGAL

—Hewlett-Packard Portugal Ltda.

ROMANIA

—Hewlett-Packard (Romania) SRL

RUSSIA

—ZAO Hewlett-Packard AO

SERBIA-MONTENEGRO

—Hewlett-Packard d.o.o. (Beograd)

SINGAPORE

—Hewlett-Packard Asia Pacific Pte. Ltd.

—Hewlett-Packard Singapore (Private) Limited

—Hewlett-Packard Singapore (Sales) Pte. Ltd.

—HP Financial Services (Singapore) Pte. Ltd.

SLOVAKIA

—Hewlett-Packard (Slovakia) s.r.o.

SLOVENIA

—Hewlett-Packard d.o.o., druzba za tehnoloske resitve

SOUTH AFRICA

—Hewlett-Packard 1997 South Africa (Proprietary) Ltd.

SPAIN

—Hewlett-Packard CRS (Spain), S.L.

—Hewlett-Packard Espanola, S.L.

SWEDEN

—Hewlett-Packard Sverige AB

—HP CRS (Sweden) AB

SWITZERLAND

—Hewlett-Packard International Sarl

—Hewlett-Packard (Schweiz) GmbH

—HP CRS (Switzerland) GmbH

TAIWAN

—Hewlett-Packard Taiwan Ltd.

THAILAND

—Hewlett-Packard (Thailand) Ltd.

—HPFS Leasing (Thailand) Co. Ltd.

TURKEY

—Hewlett-Packard Teknoloji Cozumleri Limited Sirketi

UNITED ARAB EMIRATES

—Hewlett-Packard Middle East FZ-LLC

UNITED KINGDOM

—Hewlett-Packard Ltd.

—Hewlett-Packard Manufacturing Ltd.

—HP CRS (UK) Ltd.

UNITED STATES

—Hewlett-Packard Development Company L.P.

—Hewlett-Packard Financial Services Company

—Hewlett-Packard World Trade, Inc.

—HPDirect Inc.

—Compaq Computer Caribbean, Inc.

—Compaq Latin America Corporation

—HPQ Holdings, LLC

—Indigo America, Inc.

VENEZUELA

—Hewlett-Packard de Venezuela C.C.A.

—HP Financial Services Venezuela, C.C.A.

VIETNAM

—Hewlett-Packard Vietnam Ltd.

Exhibit 23

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements on Form S-3(Nos. 333-30786, 333-83346 and 333-86378) and in the related Prospectuses, and the RegistrationStatements on Form S-8 (Nos. 2-90239, 2-92331, 2-96361, 33-30769, 33-31496, 33-31500, 33-38579,33-50699, 33-52291, 33-58447, 33-65179, 333-22947, 333-30459, 333-45231, 333-35836, 333-70232,333-85136, 333-87742, 333-87788, 333-113148, 333-114253, 333-114254, 333-114255 and 333-114346) ofHewlett-Packard Company, of our report dated November 16, 2004, with respect to the consolidatedfinancial statements and schedule of Hewlett-Packard Company included in this Annual Report(Form 10-K) for the year ended October 31, 2004.

/s/ ERNST & YOUNG LLP

San Jose, CaliforniaJanuary 12, 2005

Exhibit 31.1

CERTIFICATION

I, Carleton S. Fiorina, certify that:

1. I have reviewed this Annual Report on Form 10-K of Hewlett-Packard Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in light of the circumstancesunder which such statements were made, not misleading with respect to the period covered by thisreport;

3. Based on my knowledge, the financial statements, and other financial information included in thisreport, fairly present in all material respects the financial condition, results of operations and cashflows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) forthe registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls andprocedures to be designed under our supervision, to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures andpresented in this report our conclusions about the effectiveness of the disclosure controls andprocedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reportingthat occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscalquarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recentevaluation of internal control over financial reporting, to the registrant’s independent auditors andthe audit committee of the registrant’s board of directors (or persons performing the equivalentfunctions):

a) all significant deficiencies and material weaknesses in the design or operation of internalcontrol over financial reporting which are reasonably likely to adversely affect the registrant’sability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal control over financial reporting.

Date: January 14, 2005 /s/ CARLETON S. FIORINA

Carleton S. FiorinaChairman and Chief Executive Officer

(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION

I, Robert P. Wayman, certify that:

1. I have reviewed this Annual Report on Form 10-K of Hewlett-Packard Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in light of the circumstancesunder which such statements were made, not misleading with respect to the period covered by thisreport;

3. Based on my knowledge, the financial statements, and other financial information included in thisreport, fairly present in all material respects the financial condition, results of operations and cashflows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) forthe registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls andprocedures to be designed under our supervision, to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures, andpresented in this report our conclusions about the effectiveness of the disclosure controls andprocedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reportingthat occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscalquarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recentevaluation of internal control over financial reporting, to the registrant’s independent auditors andthe audit committee of the registrant’s board of directors (or persons performing the equivalentfunctions):

a) all significant deficiencies and material weaknesses in the design or operation of internalcontrol over financial reporting which are reasonably likely to adversely affect the registrant’sability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal control over financial reporting.

Date: January 14, 2005 /s/ ROBERT P. WAYMAN

Robert P. Wayman,Executive Vice President and

Chief Financial Officer(Principal Financial Officer)

Exhibit 32

CERTIFICATIONOF

CHIEF EXECUTIVE OFFICERAND

CHIEF FINANCIAL OFFICERPURSUANT TO 18 U.S.C. 1350,AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Carleton S. Fiorina, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of Hewlett-Packard Companyfor the fiscal year ended October 31, 2004 fully complies with the requirements of Section 13(a) or15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report onForm 10-K fairly presents, in all material respects, the financial condition and results of operations ofHewlett-Packard Company.

January 14, 2005 By: /s/ CARLETON S. FIORINA

Carleton S. FiorinaChairman and Chief Executive Officer

I, Robert P. Wayman, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of Hewlett-Packard Companyfor the fiscal year ended October 31, 2004 fully complies with the requirements of Section 13(a) or15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report onForm 10-K fairly presents, in all material respects, the financial condition and results of operations ofHewlett-Packard Company.

January 14, 2005 By: /s/ ROBERT P. WAYMAN

Robert P. WaymanExecutive Vice President andChief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Hewlett-Packard Company and will be retained by Hewlett-Packard Company and furnished to the Securitiesand Exchange Commission or its staff upon request.